Minnesota Step-Up in Basis Guide

When you inherit property in Minnesota, its tax basis usually resets to the fair market value on the date of death. This step-up in basis can erase decades of appreciation for capital gains purposes, so an heir who sells shortly after inheriting often owes little or no capital gains tax. The rule is federal, it applies to Minnesota heirs, and it can save a family thousands of dollars.

Understanding the step-up matters whether you plan to keep inherited property, sell it, or transfer it. This guide explains the rules, shows you how to calculate your new basis, and keeps one point front and center: the step-up affects the income tax an heir owes at sale, which is a different question from the Minnesota estate tax the estate may owe at death.

What Is Step-Up in Basis?

When someone buys property or an asset, they have a "tax basis" in it, usually equal to what they paid. When they sell, they owe capital gains tax on the difference between the sale price and that basis.

The Problem Without Step-Up

Imagine your mother bought a house in Duluth in 1985 for $60,000. When she died in 2026, the house was worth $280,000. If she had given you the house as a gift during her life, your basis would have been her original $60,000 (called "carryover basis"). Selling for $280,000 would leave you with $220,000 in taxable capital gains.

How Step-Up Fixes This

Because you inherited the house instead of receiving it as a lifetime gift, your basis steps up to the fair market value on the date of death: $280,000. If you sell for $280,000, your capital gain is $0. Even if you sell a year later for $295,000, your taxable gain is only $15,000 instead of $235,000.

The Legal Foundation

The step-up in basis comes from Internal Revenue Code Section 1014, which sets the basis of property acquired from a decedent at its fair market value on the date of death. It applies to property that passes through:

• Probate
• A revocable living trust
• Joint tenancy with right of survivorship (for the decedent's share)
• A transfer on death deed
• A beneficiary designation

Minnesota Estate Tax vs. Step-Up in Basis

This is the point families get wrong most often, so it is worth slowing down. Minnesota is one of the states that levies its own estate tax, and it is easy to blur that tax together with the step-up. They are two different taxes that hit at two different moments.

The step-up in basis is about income tax. It changes the capital gains an heir reports when they later sell an inherited asset. It is measured against the heir, at the time of sale, on the appreciation after death.

The Minnesota estate tax is about the estate. It can apply at death, based on the total value of everything the decedent owned, and it is paid by the estate before assets reach the heirs. Minnesota imposes this tax on estates above a $3,000,000 exclusion under Minn. Stat. 291.016, for deaths in 2020 and after. The exclusion is a flat figure that is not adjusted for inflation, and unlike the federal exclusion it is not portable between spouses. Rates run on a graduated schedule from 13% to 16% under Minn. Stat. 291.03.

Because Minnesota's $3,000,000 threshold sits far below the federal exclusion, an estate can owe Minnesota estate tax while owing no federal estate tax at all. When the federal gross estate plus adjusted taxable gifts exceeds $3,000,000, the estate generally files a Minnesota estate tax return (Form M706), due nine months after death.

Two takeaways keep the concepts straight:

1. The step-up can reduce or eliminate the capital gains tax an heir pays when they sell. It does nothing to lower the estate tax.
2. The Minnesota estate tax is a separate tax on the estate at death. Most families never reach it, but the $3,000,000 exclusion catches more Minnesota estates than the federal rules do.

For a fuller walk through the estate tax and the M706 filing, and how it stacks against the federal estate tax, see the Minnesota and the federal estate tax guide and the Minnesota estate planning basics guide. Minnesota has no inheritance tax, which the Department of Revenue confirms was repealed starting in 1980, so beneficiaries pay no state tax simply for receiving an inheritance.

How Step-Up Works for Minnesota Inherited Property

What Qualifies for Step-Up

Nearly all capital assets inherited from a decedent receive a step-up:

• Real estate (homes, land, commercial property)
• Stocks and bonds
• Mutual funds and ETFs
• Business interests
• Collectibles and artwork
• Personal property worth documenting

What Does Not Qualify

Certain assets do not receive a step-up:

• Income in respect of a decedent (IRD): Traditional IRAs, 401(k)s, and other tax-deferred retirement accounts. Distributions are taxed as ordinary income to the beneficiary.
• Property gifted before death: If the decedent gave you the asset as a lifetime gift, you generally take their original basis (carryover basis under IRC 1015).
• Assets transferred within one year of death: If you gave property to the decedent and it returned to you within one year of their death, no step-up applies (IRC 1014(e)).

Separate Property, Not Community Property

Minnesota is a common-law (separate property) state, not a community property state. That single fact controls how much of a jointly owned asset steps up:

• Only the decedent's share of jointly owned property receives a step-up.
• If spouses own a home as joint tenants with right of survivorship, only half the property steps up when the first spouse dies.
• The surviving spouse's half keeps its original basis.

This is different from community property states, where the entire asset can step up on the first death. Minnesota married couples get a single step-up, not a double one, so how property is titled and who holds the appreciated assets both matter.

Calculating Your New Tax Basis

Step 1: Determine Fair Market Value at Death

The date-of-death value becomes your new basis. For different asset types:

Real Estate:

• Get a professional appraisal as of the date of death.
• The estate may already have a valuation from the probate inventory.
• Keep this documentation permanently.

Stocks and Publicly Traded Securities:

• Use the average of the high and low trading prices on the date of death.
• If the death falls on a weekend or holiday, average the trading prices from the business days before and after.

Closely Held Business Interests:

• These require a professional business valuation.
• The estate may have obtained one for estate tax or probate purposes.

Personal Property:

• Use appraisals for high-value items.
• Use fair market value based on comparable sales for the rest.

Step 2: Adjust for the Alternate Valuation Date

If the estate files a federal estate tax return (Form 706), the executor may elect the alternate valuation date, which is six months after death. That election is allowed only when it lowers both the gross estate and the estate tax owed. If it is made, your basis is the value on that alternate date, or the value on the date of disposition if the asset was sold within the six months.

Most Minnesota estates do not file a federal Form 706 because the federal exclusion is so high, so this election is uncommon. A Minnesota Form M706 alone does not create the alternate valuation election; that election lives in the federal return.

Step 3: Add Post-Death Improvements

After you inherit, any capital improvements you make increase your basis:

• Renovations and additions
• Major upgrades that add value, such as a new roof or new HVAC
• Land improvements

Keep receipts and records of each improvement.

Example Calculation

Step-Up for Different Asset Types

Real Estate

Real estate is the most common asset where step-up matters. Inherited Minnesota real estate can arrive through several channels:

• Probate: The stepped-up basis passes to the heir through the Minnesota probate process.
• Trust: Property held in a revocable living trust receives the same step-up as probate property.
• Transfer on death deed: Property passing by a Minnesota transfer on death deed receives the step-up.
• Survivorship deed: The decedent's share steps up; the surviving owner's share does not.

Stocks and Securities

Each security held at death steps up to its date-of-death value. This helps most with stocks held for decades that carry large unrealized gains.

Mutual funds: The basis steps up to the net asset value on the date of death, wiping out previously unrealized gains inside the fund.

Brokerage accounts: Contact the broker for date-of-death values. Most brokers can produce a date-of-death statement.

Family Businesses

Business interests receive a step-up, and the mechanics depend on the entity:

• Sole proprietorship: Each business asset steps up individually.
• Partnership or LLC: The inherited interest steps up, and a Section 754 election can adjust the inside basis of the entity's assets.
• S corporation: The stock basis steps up, but the inside basis of corporate assets does not change.

Collectibles and Personal Property

Art, antiques, jewelry, vehicles, and other high-value personal property all step up. Document the date-of-death worth with professional appraisals.

Minnesota Capital Gains Tax

Minnesota does not have a separate capital gains tax rate. Instead, capital gains are taxed as part of your income under the state's graduated income tax.

Minnesota Income Tax Rates

Minnesota uses four graduated brackets under Minn. Stat. 290.06, subd. 2c, running from 5.35% to 9.85% for the top bracket. The dollar thresholds for each bracket adjust annually and vary by filing status, so check the current-year figures for the year you sell. Because your basis stepped up to the date-of-death value, this tax applies only to appreciation after you inherited.

Deductions That Can Reduce the Gain

Several costs reduce your taxable gain:

• Selling expenses, such as real estate commissions and closing costs
• Legal and accounting fees tied to the sale
• Capital improvements, which add to your basis

Federal Capital Gains Tax

At the federal level, long-term capital gains (assets held more than one year) receive preferential rates:

These are 2025 thresholds; amounts adjust annually for inflation.

Net Investment Income Tax

An additional federal 3.8% tax applies to net investment income, including capital gains, for individuals with modified adjusted gross income above $200,000 (single) or $250,000 (married filing jointly).

Holding Period for Inherited Property

Inherited property is automatically treated as long-term, no matter how long the decedent or the heir actually held it (IRC 1223(9)). You qualify for the lower long-term rates even if you sell the day after you inherit.

Planning Strategies to Consider

Hold Appreciated Assets Until Death

The most direct strategy: if you own highly appreciated assets, holding them until death lets your heirs receive a full step-up. Selling before death triggers capital gains tax that the step-up could have erased.

Gift Low-Basis Assets Carefully

When you gift property during your life, the recipient takes your original basis (carryover basis), which throws away the step-up. If you plan to give assets away, favor assets with little unrealized gain and keep the highly appreciated ones in your estate.

Use a Revocable Living Trust

Property in a Minnesota revocable living trust receives the same step-up as property passing through probate, so you keep the tax benefit while avoiding court. Use the Minnesota probate fee calculator to see what you could save against typical Minnesota probate costs, and read how to avoid probate in Minnesota for the non-probate transfers that keep the step-up.

Watch the Estate Tax and the Basis Question Together

Because Minnesota taxes estates above $3,000,000, a larger estate has to weigh two goals at once: keeping the estate tax down at death and preserving the step-up for heirs at sale. Married couples cannot rely on portability for the Minnesota exclusion, so titling and trust planning both matter. If your estate is near or above $3,000,000, or you own farm or business property, work with a Minnesota estate planning attorney before acting on any general figure.

Document Everything

The IRS can challenge your claimed basis. Protect yourself by keeping date-of-death appraisals, the estate inventory, records of every improvement, and your sale-related expenses.

Record-Keeping Requirements

Good records support the stepped-up basis you claim:

At Time of Inheritance

• Date-of-death appraisals for real estate
• Brokerage statements showing date-of-death values
• The estate inventory filed with the district court
• Business valuations
• Appraisals of high-value personal property

During Ownership

• Records of capital improvements
• Property tax records
• Maintenance and repair records, to separate improvements from routine repairs

At Time of Sale

• Settlement statements (Closing Disclosure)
• Real estate commission receipts
• Legal and accounting fees
• Any other selling expenses

Keep these documents for at least three years after you file the return that reports the sale, though holding them longer is wise.

Frequently Asked Questions

Is the step-up in basis the same as the Minnesota estate tax?

No. They are two different taxes. The step-up in basis affects the income tax an heir owes on capital gains when they sell an inherited asset. The Minnesota estate tax is a separate tax the estate itself may owe at death, based on the total value of the estate above the $3,000,000 exclusion. A step-up lowers or eliminates capital gains tax at sale, but it does not reduce the estate tax the estate pays at death.

Does Minnesota tax capital gains on inherited property?

Yes, but only on the gain above your stepped-up basis. Minnesota has no separate capital gains rate. It taxes capital gains as part of your income at graduated rates from 5.35% to 9.85% under Minn. Stat. 290.06. Because your basis steps up to the date-of-death value, you owe Minnesota income tax only on appreciation that happens after you inherit.

Does the step-up apply if there is no probate?

Yes. The step-up applies to property acquired from a decedent regardless of how it transfers. Property passing through a Minnesota transfer on death deed, a revocable living trust, joint tenancy with right of survivorship, or a beneficiary designation all receive the step-up, the same as property passing through probate.

If my spouse and I own our home jointly, does the whole house step up?

No. Minnesota is a common-law (separate property) state, not a community property state. When one spouse dies, only the deceased spouse's half of a jointly owned home steps up to the date-of-death value. The surviving spouse's half keeps its original basis. This is different from community property states, where the entire asset can step up.

Do retirement accounts get a step-up in basis?

No. Traditional IRAs, 401(k)s, and similar tax-deferred accounts are income in respect of a decedent. They do not receive a basis step-up, and the beneficiary pays ordinary income tax on distributions. This is one of the biggest exceptions to the step-up rule.

What if the inherited property lost value before death?

The adjustment works in both directions. If an asset was worth less at death than the decedent paid for it, the basis steps down to the lower date-of-death value. Heirs cannot claim the paper loss the decedent could have claimed, so families sometimes sell a loss asset before death rather than passing it on.

Related Minnesota Guides

• Minnesota Estate Planning Basics
• Minnesota Probate Guide
• Selling Inherited Property in Minnesota
• Minnesota Revocable Living Trust
• Minnesota Transfer on Death Deed
• How to Avoid Probate in Minnesota
• Minnesota Probate Cost Calculator

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Last Updated: July 2026. This guide provides general information about the step-up in basis for Minnesota inherited property. Tax situations vary by individual. Consult with a tax professional, CPA, or a licensed Minnesota attorney about your situation. It is not legal advice.