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South Dakota Step-Up in Basis
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South Dakota Step-Up in Basis

Inherited South Dakota property resets to its date-of-death value under IRC 1014, and South Dakota charges no income tax on a sale.

By Settled Editorial

When you inherit property in South Dakota, its tax basis resets to the fair market value on the date the owner died. That reset comes from federal law, Internal Revenue Code Section 1014, and it erases the capital gain that built up while the owner held the asset. You owe federal tax only on growth after the death, and only when you sell.

South Dakota keeps the rest simple. The state has no inheritance tax, no estate tax and no income tax, so no South Dakota tax touches the inheritance or the later sale. The work that remains is proving the date-of-death value, and knowing which assets reset in full, which reset by half, and which do not reset at all. Every rule below was read at its official source on September 27, 2026.

What The Step-Up Does

Basis is what the tax system treats as your cost. When you sell, you pay capital gains tax on the sale price minus that basis. The step-up changes the starting number.

A Sioux Falls example

Say your father bought a house in Sioux Falls in 1995 for $120,000. At his death in 2026 it is worth $410,000. If he had deeded it to you during his life, you would take his $120,000 cost, called a carryover basis, and a sale at $410,000 would show a $290,000 gain.

Because you inherited the house instead, your basis steps up to $410,000. Sell it for $410,000 and your gain is zero. Sell it two years later for $435,000 and you report a $25,000 gain on your federal return, less the costs of the sale.

The rule comes from federal law

Internal Revenue Code Section 1014(a) gives property acquired from a decedent a basis equal to "the fair market value of the property at the date of the decedent's death," with narrow alternatives such as the alternate valuation date. The South Dakota code has no basis rule of its own. South Dakota law still matters in two places: how the date-of-death value gets documented in probate, and whether a married couple's property counts as community property.

The adjustment runs both ways. An asset worth less at death than the owner paid steps down to that lower value, and the loss the owner could have claimed in life disappears.

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South Dakota Charges No Tax On The Inheritance Or The Sale

Heirs often mix up three different taxes. Here is where each one stands for a South Dakota family.

  • No tax for receiving an inheritance. The South Dakota Department of Revenue states that "South Dakota does not have an inheritance tax" and that the voters repealed it effective July 1, 2001. The same page adds: "There is also no estate tax."
  • No state tax on the gain when you sell. The Department states that "South Dakota is one of seven states that does not impose a state income tax." A sale of inherited property creates no South Dakota return and no South Dakota tax.
  • Federal tax still applies. Federal income tax reaches any gain above your stepped-up basis. The federal estate tax reaches only very large estates, and estate tax is a different tax with its own guide. That page covers whether the estate owes a transfer tax, and this page covers what you pay when you sell. The South Dakota estate tax page shows whether an estate comes near the federal exemption.

Joint Property Between Spouses Gets A Half Step-Up

This is the South Dakota rule that surprises widows and widowers the most.

How the half step-up works

South Dakota is not among the nine community property states that IRS Publication 551 lists. Many South Dakota couples own the house, the land and the brokerage account as joint tenants instead.

When a married couple are the only joint tenants, Internal Revenue Code Section 2040(b) includes one-half of the value in the first spouse's gross estate. It does not matter which spouse paid for the property. Publication 551 then says the survivor's basis is "the cost of your half of the property with certain adjustments," increased by the basis in the half inherited.

The Sioux Falls house, owned by a married couple

Go back to the $120,000 house, now worth $410,000 when the husband dies, and assume the couple held it as joint tenants. The widow's basis becomes $60,000 for her original half plus $205,000 for his half, or $265,000. A sale at $410,000 shows a $145,000 gain.

That gain is not automatically taxed. Section 121(b)(4) lets an unmarried surviving spouse exclude up to $500,000 of gain on a home instead of $250,000, if the sale happens no later than two years after the spouse's death and the ownership and use tests were met immediately before that death. For a home, the timing of the sale often matters more than the basis math.

The South Dakota special spousal trust

South Dakota lets a married couple opt into community property through a trust. SDCL 55-17-1 creates a South Dakota special spousal trust when one or both spouses transfer property to a trust that expressly declares the property to be South Dakota special spousal property, and at least one trustee is a qualified person. Here is how the chapter sets it up:

  • Both spouses must sign the trust, and it may be revocable or irrevocable.
  • A qualified person under SDCL 55-3-41 is a South Dakota resident individual, a trust company with its principal place of business in South Dakota, or a South Dakota bank that exercises trust powers.
  • SDCL 55-17-2 requires a warning paragraph, in capital letters, at the beginning of the trust.
  • SDCL 55-17-3 has the spouses declare in the trust that the property is community property, and sets each spouse's share at fifty percent unless the document says otherwise.

SDCL 55-17-5 then states the tax purpose: for Section 1014(b)(6), "a South Dakota special spousal trust is a trust established under the community property laws of this state." Senate Bill 100, enacted as SL 2026, chapter 198 and signed March 10, 2026, updated that section's Internal Revenue Code reference to January 1, 2026. The act names no effective date, so SDCL 2-14-16 made it effective July 1, 2026.

Section 1014(b)(6) gives the surviving spouse's one-half share of community property a new basis at the first death, if at least one-half of the whole community interest was includible in the decedent's gross estate. If it applies, the widow in the example above would take a $410,000 basis in the whole house instead of $265,000.

Where the federal answer is still open

South Dakota can say what its own law means. Only federal law decides whether the IRS agrees. IRS Publication 555, the IRS guide to community property, says it "doesn't address the federal tax treatment of income or property subject to the 'community property' election under Alaska, Tennessee, and South Dakota state laws." So a family relying on a special spousal trust for a full reset should have a CPA review the trust and the deeds before anyone sells, and should plan on the half step-up as the fallback.

Where The Date-Of-Death Value Gets Written Down

The step-up is worth only as much as your proof of the number.

The inventory carries it

SDCL 29A-3-706, "Duty of personal representative, Inventory and appraisement," gives the personal representative "six months after appointment, or nine months after the decedent's death, whichever is later" to prepare an inventory of the property the decedent owned at death. Each item shows "its fair market value as of the date of the decedent's death, and the type and amount of any encumbrance."

That is your basis document. It is dated to the death, itemized, and records the loans that bear on value.

South Dakota does not make anyone file it

The personal representative "shall promptly make a copy of the inventory available, by mail or delivery, to any interested person who requests it," and "may also file the original of the inventory with the court." Filing is optional. In many South Dakota estates the only copy stays with the personal representative, so ask for yours in writing while the estate is open. Valuing assets for the inventory walks through the personal representative's side of the job.

Appraisers and corrections

SDCL 29A-3-707 lets the personal representative hire "a qualified and disinterested appraiser" for any asset whose value "may not be readily ascertainable," allows different appraisers for different kinds of assets, and requires each appraiser's name and address on the inventory beside the items appraised. If a value turns out to be wrong, SDCL 29A-3-708 requires a supplementary inventory showing the corrected date-of-death value and the data relied on.

The assessment roll is not your basis

South Dakota's small estate route for land uses a shortcut that can mislead heirs. SDCL 29A-3-1203 lets successors value non-agricultural real estate "as shown on the assessment rolls" to show the decedent's South Dakota real property does not exceed $50,000. That figure answers whether the affidavit is available. It is not the fair market value Section 1014 uses, so order a date-of-death appraisal anyway.

What to gather, asset by asset

  • Houses and town lots. A written appraisal as of the date of death.
  • Farm and ranch land. A separate appraisal as of the date of death. The appraiser's report is worth far more than a neighbor's sale price when you sell years later.
  • Listed stocks and bonds. A date-of-death valuation statement from the broker. The IRS Form 706 instructions value listed securities at the mean between the highest and lowest selling prices on the valuation date.
  • A business interest or cattle herd. A written valuation from a qualified appraiser.

Add what you spend afterward

Capital improvements you make after you inherit raise your basis: a new roof, an addition, a well, a machine shed. Ordinary repairs do not. Keep the invoices with your inventory copy.

What Steps Up And What Does Not

These South Dakota routes all produce a date-of-death basis:

  • Property distributed out of a South Dakota probate, with a will or without one, under Section 1014(b)(1)
  • Assets in a funded South Dakota revocable living trust, because Section 1014(b)(2) covers property the decedent could revoke
  • Real estate passing by a South Dakota transfer on death deed under SDCL 29A-6-403, since Section 1014(b)(9) covers property included in the decedent's gross estate by reason of the form of ownership
  • The decedent's share of a joint tenancy, plus payable on death accounts and securities registered in beneficiary form
  • Personal property collected on a South Dakota small estate affidavit under SDCL 29A-3-1201, since that route changes the paperwork and leaves the tax treatment alone

Three things do not step up:

  1. Income in respect of a decedent. Section 1014(c) excludes it. Traditional IRAs and 401(k) plans carry no reset, and withdrawals are federal ordinary income.
  2. Lifetime gifts. Property handed over before death keeps the donor's basis. That is the Sioux Falls example's $290,000 problem.
  3. Property you gave the decedent within a year of death. Section 1014(e) sends appreciated property back to the donor, or the donor's spouse, at the decedent's old basis.

Selling After The Step-Up

Long-term treatment is automatic

Internal Revenue Code Section 1223(9) says a person who takes property with a Section 1014 basis and sells it within a year of the death "shall be considered to have held such property for more than 1 year." Even a quick sale gets the lower federal long-term capital gains rates.

The alternate valuation date rarely applies

Internal Revenue Code Section 2032 lets an executor value the estate six months after death, but Section 2032(c) allows the election only where it lowers both the gross estate and the estate tax. Most South Dakota estates owe no federal estate tax, so the date-of-death figure is the basis.

Who signs the deed

Basis is the number, and the sale is the transaction. A personal representative can sell estate land under SDCL 29A-3-715, a transfer on death beneficiary first records an affidavit of confirmation under SDCL 29A-6-427, and small estate successors use the recorded affidavit. For the title company's checklist, see selling the inherited house.

Records To Keep

Hold these together, and keep them for as long as you own the asset:

  • Your copy of the SDCL 29A-3-706 inventory, any supplementary inventory, and any appraiser's report named on it
  • Date-of-death appraisals for real estate and farmland, and the broker's valuation statement for securities
  • Every deed in the chain, since joint tenancy, a transfer on death deed and a trust each change how the property passed
  • Any special spousal trust document, with its declaration of community property
  • Invoices for capital improvements made after you inherited
  • The settlement statement, commission receipts and fees from the eventual sale

Frequently Asked Questions

Does South Dakota tax me when I inherit property or sell it later?

No on both counts at the state level. The South Dakota Department of Revenue states that South Dakota does not have an inheritance tax, that there is also no estate tax, and that South Dakota is one of seven states that does not impose a state income tax. With no state income tax, there is no South Dakota tax on the gain when you sell. Federal income tax still applies to any gain above your stepped-up basis.

What is my basis in a house I inherited in South Dakota?

Usually the fair market value on the date of death. Internal Revenue Code Section 1014(a)(1) gives property acquired from a decedent a basis equal to its fair market value at the date of the decedent's death. If you sell for that value, you report no gain. You report gain only on growth after the death, plus or minus the costs of the sale.

Does the whole house step up when my spouse dies in South Dakota?

Usually only half, if you owned it together. South Dakota is not one of the nine community property states IRS Publication 551 lists. For a married couple who are the only joint tenants, IRS Publication 551 includes one-half of the value in the first spouse's gross estate, so only that half resets. A South Dakota special spousal trust under SDCL chapter 55-17 is written to claim the full community property reset, but IRS Publication 555 says it does not address the federal treatment of that election, so confirm it with a CPA before relying on it.

Where does the date-of-death value get written down in a South Dakota estate?

In the inventory. SDCL 29A-3-706 gives the personal representative six months after appointment, or nine months after the death, whichever is later, to prepare an inventory showing each item's fair market value as of the date of death and any encumbrance. The personal representative must promptly send a copy to any interested person who asks for one, and may file the original with the court. Ask for your copy in writing.

Can I use the tax assessment as my basis?

Not safely. SDCL 29A-3-1203 lets a successor value non-agricultural real estate from the assessment rolls to qualify for the real-property affidavit, but that is a test for the affidavit, not the fair market value Section 1014 uses. Get a written appraisal as of the date of death for the tax basis.

Do inherited retirement accounts get a step-up?

No. Internal Revenue Code Section 1014(c) says the basis rule does not apply to property that is a right to receive an item of income in respect of a decedent. A traditional IRA or 401(k) carries no basis reset, and the beneficiary pays federal ordinary income tax on withdrawals. South Dakota adds no state income tax on top.

Related South Dakota Guides

This guide is general information about South Dakota estates and federal income tax basis rules. Basis turns on how each asset was titled and valued, so confirm anything that affects your return with a CPA or a licensed South Dakota attorney.

Sources:

It is not legal advice.

Information current as of September 27, 2026

Settled Estate is not a law firm, and this content is for informational purposes only and does not constitute legal advice. Probate laws and procedures in South Dakota can change. Consult with a qualified attorney for advice specific to your situation. Full disclaimer.

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