Tennessee Step-Up in Basis Guide

When you inherit property in Tennessee, the tax basis of that property usually resets to its fair market value on the date the owner died. Tax law calls this the step-up in basis, and it can erase decades of appreciation for capital gains purposes. You then owe tax only on any growth in value after you inherited the asset, not on the gain that built up during the decedent's lifetime.

Tennessee adds a second advantage that most states do not. The state charges no general income tax, so it charges no separate capital gains tax. When you sell an inherited asset in Tennessee, only federal capital gains tax is in play. This guide explains how the step-up works, how to calculate your new basis, and how to plan around it, whether you keep the property, sell it, or move it into a trust.

What Is Step-Up in Basis?

Basis is what the tax system treats as your investment in an asset. When you buy a house or a share of stock, your basis usually equals what you paid. When you sell, you owe capital gains tax on the difference between the sale price and your basis.

The Problem Without a Step-Up

Say your father bought a house in Knoxville in 1990 for $70,000. He died in 2025 when the house was worth $340,000. If he had given you the house during his life, you would have taken his original $70,000 basis, called a carryover basis. Selling for $340,000 would then produce $270,000 of taxable gain.

How the Step-Up Fixes It

Because you inherited the house instead of receiving it as a gift, your basis steps up to the $340,000 date-of-death value. Sell for $340,000 and your gain is zero. Sell a year later for $360,000 and your taxable gain is only $20,000 rather than $290,000.

The Legal Foundation

The step-up 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 whether the property reaches you through:

• Probate
• A revocable living trust
• A survivorship deed (the decedent's share)
• A beneficiary or payable-on-death designation

How the Step-Up Works for Tennessee Inherited Property

What Qualifies

Most capital assets you inherit from a decedent receive a step-up:

• Real estate (homes, land, commercial property)
• Stocks, bonds, mutual funds, and ETFs
• Business interests
• High-value personal property such as art, jewelry, and collectibles

What Does Not Qualify

Some assets never receive a step-up:

• Income in respect of a decedent (IRD): Traditional IRAs, 401(k)s, and other tax-deferred retirement accounts. The beneficiary pays ordinary federal income tax on withdrawals, and the basis does not reset.
• Property gifted before death: A lifetime gift carries the decedent's original basis to you under IRC Section 1015 (carryover basis), not a stepped-up basis.
• Property you gave the decedent within one year of death: If you gave an asset to the decedent and it returns to you because they died within one year, no step-up applies under IRC Section 1014(e).

Tennessee Is a Separate-Property State (Single Step-Up)

Tennessee is a common-law, separate-property state, not a community-property state. That distinction controls how much basis steps up when a co-owner dies:

• Only the decedent's share of jointly owned property steps up.
• If spouses own a home as tenants by the entirety or under a stated right of survivorship, only half the home steps up when the first spouse dies. The surviving spouse's half keeps its original basis.
• Tennessee does not offer the double step-up that community-property states give, where the whole asset steps up on the first death under IRC Section 1014(b)(6).

One Tennessee wrinkle matters here. The state abolished automatic survivorship in joint tenancy under Tenn. Code Ann. 66-1-107, so a deed carries survivorship only if it says so in plain words. Either way, the survivor's own half keeps its original basis.

Calculating Your New Tax Basis

Step 1: Fix the Fair Market Value at Death

The date-of-death value becomes your new basis. How you prove it depends on the asset:

• Real estate: Order a professional appraisal as of the date of death. Keep it permanently.
• Publicly traded securities: Use the average of the high and low trading prices on the date of death. If death fell on a weekend or holiday, average the trading days before and after.
• Business interests: Get a professional valuation.
• Personal property of value: Use an appraisal or comparable sales.

Step 2: Check the Alternate Valuation Date

If the estate files a federal estate tax return (Form 706), the executor can elect the alternate valuation date, which is six months after death. That election is available only when it lowers both the gross estate and the estate tax, under IRC Section 2032. If the executor makes it, your basis is the value on that later date. Most Tennessee estates never file a Form 706 because the federal exemption is high, so this election is rare.

Step 3: Add Post-Death Improvements

Capital improvements you make after inheriting the property raise your basis. Keep receipts for renovations, additions, and value-adding work such as a new roof or HVAC system. Routine maintenance does not count.

Example Calculation

Step-Up for Different Asset Types

Real Estate

Real estate is where the step-up matters most for Tennessee families. Inherited real estate can reach you through several channels:

• Probate: Tennessee real property generally vests in the heirs or devisees at the moment of death and takes the stepped-up basis. See the Tennessee probate guide.
• Revocable living trust: Property held in a revocable living trust receives the same step-up as probate property.
• Survivorship deed: The decedent's share steps up; the surviving owner's share does not.

Tennessee does not offer a real-property transfer-on-death deed, so families keep a home out of probate with a trust, tenancy by the entirety, an express survivorship deed, or a life estate. The how to avoid probate in Tennessee guide lays out those routes. If you plan to sell the home rather than keep it, the selling inherited property in Tennessee guide walks through clearing title and applying this stepped-up basis at the sale.

Stocks and Securities

Each security held at death steps up to its date-of-death value, which erases the built-in gain on shares held for decades. Mutual funds step up to their net asset value on the date of death. A brokerage account that carries a transfer-on-death registration still delivers a stepped-up basis to the named beneficiary. Ask the broker for a date-of-death valuation statement.

Family Businesses

Interests in partnerships, LLCs, S corporations, and sole proprietorships step up. The details 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 corporation's inside asset basis does not change.

No Tennessee Capital Gains Tax

Here is the Tennessee advantage. The state levies no general income tax on wages, salaries, or other income. The Hall income tax, which once taxed interest and dividends, was fully repealed effective January 1, 2021. Because Tennessee has no income tax, it has no separate tax on capital gains.

So when you sell inherited property in Tennessee, only federal capital gains tax applies. There is no state capital gains layer to calculate, report, or plan around. Between the step-up and the absent state tax, an heir who sells soon after inheriting often owes little or nothing on the sale.

Federal Capital Gains Tax

Federal tax still applies to any gain above your stepped-up basis. Long-term gains (assets held more than one year) get preferential rates:

These are 2025 thresholds; amounts adjust each year for inflation.

Net Investment Income Tax

An extra 3.8% tax applies to net investment income, including capital gains, once modified adjusted gross income passes $200,000 (single) or $250,000 (married filing jointly).

Holding Period

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

No Tennessee Estate or Inheritance Tax

Tennessee charges no state estate tax and no state inheritance tax. The former inheritance tax was fully repealed for deaths on or after January 1, 2016, so beneficiaries owe the state nothing on what they inherit. Only the federal estate tax remains, and it reaches only estates above the federal exemption. The Tennessee estate tax page covers those federal rules and the state's clean slate.

The absence of a state transfer tax makes the step-up even more useful here. You take the stepped-up basis without paying any Tennessee tax on the inheritance itself.

Planning Strategies to Maximize the Step-Up

Hold Appreciated Assets Until Death

Highly appreciated assets held until death give your heirs a full step-up. Selling them during life triggers a gain that the step-up could have erased.

Do Not Gift Highly Appreciated Property

When you gift property during life, the recipient takes your carryover basis and loses the step-up. For assets with large unrealized gains, transferring them at death almost always beats gifting them during life.

Gift Low-Basis Assets Instead

If you plan to give assets away, choose ones with little built-in gain and keep the appreciated ones in your estate for the step-up.

Use a Revocable Living Trust

Property in a revocable living trust receives the same step-up as probate property, so you avoid probate without giving up the tax benefit. Use the Tennessee probate cost calculator to compare that against Tennessee probate costs.

Mind the Surviving Spouse's Basis

Because Tennessee gives only a single step-up, only the first spouse's half of jointly owned property resets. Couples with heavily appreciated assets should look at how property is titled and whether a trust arrangement can capture more basis for each share.

Document the Date-of-Death Value

The IRS can challenge a claimed basis. Protect the step-up by getting appraisals at the time of death, keeping the estate's inventory and valuations, and saving receipts for every post-inheritance improvement and selling expense.

Record-Keeping

Good records carry the stepped-up basis from inheritance to sale:

• At inheritance: date-of-death appraisals, brokerage date-of-death statements, the probate inventory, and business valuations.
• During ownership: receipts for capital improvements, kept separate from routine repairs.
• At sale: the closing disclosure, commission receipts, and legal or accounting fees tied to the sale.

Keep these at least three years after you file the return that reports the sale, and longer if you can.

Frequently Asked Questions

Does Tennessee tax capital gains on inherited property?

No. Tennessee has no general state income tax, and the Hall tax on interest and dividends was fully repealed effective January 1, 2021, so there is no Tennessee capital gains tax. Only federal capital gains tax applies, and the step-up reduces or erases the taxable gain.

Does Tennessee have a double step-up in basis?

No. Tennessee is a common-law, separate-property state, so only the decedent's share of jointly owned property steps up. The surviving co-owner keeps their original basis. The double step-up applies only in community-property states under IRC Section 1014(b)(6).

Do retirement accounts get a step-up in Tennessee?

No. Traditional IRAs and 401(k)s are income in respect of a decedent, so they receive no basis step-up. Beneficiaries owe ordinary federal income tax on withdrawals.

What if I received the property as a gift before death?

Lifetime gifts take a carryover basis under IRC Section 1015, not a stepped-up basis. Only property transferred at death receives the step-up under IRC Section 1014.

Does Tennessee have an estate or inheritance tax?

No. Tennessee has no state estate tax, and its inheritance tax was fully repealed for deaths on or after January 1, 2016. Only the federal estate tax applies, and only to very large estates.

What if the property lost value before death?

The adjustment works both ways. If the asset was worth less at death than the decedent paid, the basis steps down to that lower date-of-death value, and the built-in loss disappears.

Related Tennessee Guides

• Tennessee Probate Guide
• How to Avoid Probate in Tennessee
• Tennessee Revocable Living Trust
• Tennessee Intestate Succession
• Tennessee Estate Tax
• Tennessee and the Federal Estate Tax

Sources

• Internal Revenue Code Section 1014 (Basis of Property Acquired from a Decedent)
• Internal Revenue Code Section 1014(e) (Property Acquired by Decedent by Gift Within One Year of Death)
• Internal Revenue Code Section 1015 (Basis of Property Acquired by Gift)
• Internal Revenue Code Section 1223(9) (Holding Period of Inherited Property)
• Internal Revenue Code Section 2032 (Alternate Valuation)
• Tenn. Code Ann. 66-1-107 (Survivorship in Joint Tenancy Abolished)
• Tennessee Department of Revenue, Hall Income Tax (repealed effective January 1, 2021), https://www.tn.gov/revenue/taxes/hall-income-tax.html
• Tennessee Department of Revenue, Inheritance Tax (repealed for deaths on or after January 1, 2016), https://www.tn.gov/revenue/taxes/inheritance-tax.html
• IRS Publication 551 (Basis of Assets)

Last Updated: July 2026. Tax rules are complex and change with each year. This guide provides general information about the step-up in basis for Tennessee inherited property. Consult a tax professional or estate planning attorney for advice specific to your situation. It is not legal advice.