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Virginia Step-Up in Basis: Inherited Property Tax
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Virginia Step-Up in Basis: Inherited Property Tax

How step up in basis works in Virginia, a common-law state where only the decedent's half of jointly owned property steps up, lowering capital gains tax when you sell.

By Settled Editorial

When you inherit property in Virginia, the tax basis of that property usually steps up to its fair market value on the date of the decedent's death. Decades of appreciation get erased for tax purposes, so you only owe capital gains tax on any increase in value after you inherited it. For many families this is the largest tax break in the whole estate.

Virginia is a common-law (separate property) state, so it does not offer the community-property double step-up that states like California and Texas give married couples. Here, when spouses own property jointly, only the deceased spouse's half steps up. This guide explains how the rule works, how to calculate your new basis, and how it fits with Virginia's income tax and probate tax.

What Is Step-Up in Basis?

When someone buys property, they have a "basis" in it, usually 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

Say your father bought a house in Richmond in 1990 for $75,000. When he died in 2026, the house was worth $400,000. If he had given you the house as a gift while he was alive, you would take his original $75,000 basis (called carryover basis). Selling for $400,000 would mean $325,000 in taxable capital gain.

How Step-Up Fixes This

Because you inherited the house instead of receiving it as a gift, your basis steps up to the fair market value on the date of death: $400,000. Sell for $400,000 and your capital gain is $0. Even if you sell a year later for $420,000, your taxable gain is only $20,000 instead of $345,000.

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 value on the date of death. It applies to property that passes through:

  • Probate
  • A revocable living trust
  • Joint tenancy with survivorship, for the decedent's share
  • A transfer-on-death deed
  • A payable-on-death or beneficiary designation

Inherited property is also treated as long-term automatically under IRC Section 1223(9), so a sale soon after death still gets long-term rates rather than higher short-term rates.

How Step-Up Works for Virginia Inherited Property

What Qualifies

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

  • Real estate, including homes, land, and commercial property
  • Stocks, bonds, mutual funds, and ETFs
  • Business interests
  • Collectibles and artwork
  • Personal property with value

What Does Not Qualify

Some assets do not step up:

  • Income in respect of a decedent (IRD). Traditional IRAs, 401(k)s, and other tax-deferred retirement accounts keep their character. Withdrawals are taxed as ordinary income to the beneficiary.
  • Property gifted before death. If the decedent gave you the property during life, you generally take their original basis under IRC Section 1015 (carryover basis).
  • Property you gave the decedent within a year of death. If you gave appreciated property to the decedent and it came back to you within one year, no step-up applies under IRC Section 1014(e).

Separate Property, Not Community Property

This is the point that trips up Virginia families who read national tax articles. Virginia is a common-law, separate-property state, not a community property state. So the double step-up does not apply here.

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

In a community property state, the entire asset would step up when the first spouse dies. In Virginia, the survivor still carries the built-in gain on their own half until they sell or die.

Here is what that looks like for a Virginia couple whose home cost $150,000 and is worth $650,000 when the first spouse dies:

HalfOriginal BasisValue at DeathBasis After Death
Decedent's half$75,000$325,000$325,000 (stepped up)
Survivor's half$75,000$325,000$75,000 (unchanged)
Total$150,000$650,000$400,000

If the survivor later sells for $650,000, the taxable gain is $250,000 rather than the $0 a community property state would allow. The federal home-sale exclusion under Section 121 can still shelter some of that gain if the survivor lived in the home as a primary residence.

Calculating Your New Basis

Step 1: Determine Fair Market Value at Death

The date-of-death value becomes your new basis.

  • Real estate: Get an appraisal as of the date of death. The estate inventory filed with the Commissioner of Accounts may already have a value.
  • Publicly traded stock: 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.
  • Closely held business interests: Use a professional business valuation.
  • Personal property: Use appraisals for high-value items and fair market value from comparable sales.

Step 2: Check 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, under IRC Section 2032. The election is allowed only when it lowers both the gross estate and the federal estate tax. Because it applies only to estates above the federal exclusion, most Virginia estates never use it.

Step 3: Add Post-Death Improvements

Capital improvements you make after inheriting increase your basis: renovations, additions, a new roof, a new HVAC system, or land improvements. Keep the receipts.

Example Calculation

ItemAmount
Fair market value at death (stepped-up basis)$400,000
Kitchen renovation you completed+$30,000
New roof you installed+$14,000
Adjusted basis$444,000
Sale price$470,000
Taxable capital gain$26,000

Virginia Capital Gains Tax

Virginia does not have a separate capital gains rate. It taxes capital gains as part of individual income at graduated rates from 2% to 5.75%, with the top rate applying to Virginia taxable income over $17,000 (Va. Code 58.1-320). (Source: Virginia Tax, Individual Income Tax Rates.)

Because the gain is taxed as ordinary income, a step-up lowers both your federal and your Virginia tax when you sell inherited property. If an estate or trust earns income during administration, that income may require a Virginia fiduciary income tax return (Form 770) in addition to federal Form 1041.

At the federal level, long-term capital gains are taxed at 0%, 15%, or 20% depending on your income, and an extra 3.8% net investment income tax can apply at higher income levels. The step-up shrinks the gain those rates apply to.

The Virginia Probate Tax Is Not a Tax on Your Basis

Virginia charges a state probate tax when a will is admitted to probate or administration is granted: about 10 cents per $100 of estate value, or roughly $1 per $1,000, on estates over $15,000. A county or city may add a local probate tax of up to one-third of the state amount (Va. Code 58.1-1712). (Source: Va. Code 58.1-1712.)

This is a recording tax the estate pays to the Clerk of the Circuit Court, not an estate tax or an inheritance tax, and it does not change your income-tax basis. The Virginia probate costs guide breaks down how the probate tax and the other fees add up.

No Virginia Estate or Inheritance Tax

Virginia has no state estate tax and no state inheritance tax. Virginia repealed its estate tax for deaths on or after July 1, 2007. The former tax was tied to the federal state death tax credit, which federal law phased out. (Source: Virginia Tax, Estate and Inheritance Taxes.)

Only the federal estate tax can apply, and it reaches only estates above the federal basic exclusion ($15,000,000 for deaths in 2026), so it affects very few families. In Virginia the step-up is about income tax on future capital gains, not about avoiding a state death tax, because the state does not levy one.

Step-Up vs. Step-Down

The adjustment runs both directions. If property lost value since the decedent bought it, the basis steps down to the lower value at death.

  • Stock purchased for $100,000
  • Worth $60,000 at death
  • Heir's basis: $60,000

If the heir sells for $60,000, there is no loss to deduct. The built-in loss disappeared at death. When an asset has a built-in loss, it can be better to sell it before death so the loss is usable for tax purposes.

Planning Around the Single Step-Up

Hold Appreciated Assets Until Death

If you own highly appreciated assets, holding them until death lets your heirs receive a step-up. Selling before death triggers capital gains tax that heirs could have avoided.

Do Not Gift Highly Appreciated Property

When you gift property during life, the recipient takes your original basis (carryover basis) and the built-in gain follows the asset. For assets that have grown a lot, transferring them at death usually leaves a smaller tax bill than gifting them during life. If you want to gift, gift assets with little built-in gain.

A Trust or TOD Deed Keeps the Step-Up

Property in a Virginia revocable living trust receives the same step-up as property that passes through probate, and so does property that passes by a Virginia transfer-on-death deed. You can avoid probate without giving up the basis benefit. See the Virginia guide to avoiding probate for the full set of options.

Watch How Married Couples Title Property

Because Virginia gives only a single step-up, how a couple holds title matters for the survivor. If one spouse holds most of the appreciated assets, planning ahead can put more of the gain in the estate that steps up first. A Virginia estate planning attorney can model the titling and any trust options for your family.

Keep the Documents That Prove Your Basis

The IRS can question a claimed basis, so keep the proof: date-of-death appraisals for real estate, brokerage statements showing date-of-death values, the estate inventory, business valuations, and receipts for any improvements you make after inheriting.

Frequently Asked Questions

Does Virginia have a double step-up in basis?

No. Virginia is a common-law (separate property) state, so under IRC Section 1014 only the decedent's half of jointly owned property steps up to its date-of-death value. The surviving co-owner's half keeps its original basis. The double step-up applies only in community property states.

Does Virginia tax the capital gain when I sell inherited property?

Yes. Virginia taxes capital gains as ordinary income at graduated rates from 2% to 5.75%, with the top rate on taxable income over $17,000 (Va. Code 58.1-320). A step-up lowers the taxable gain, so selling at the stepped-up value produces little or no Virginia taxable gain.

Does Virginia have an estate or inheritance tax?

No. Virginia has no state estate tax and no state inheritance tax. It repealed its estate tax for deaths on or after July 1, 2007. Only the federal estate tax can apply, and it reaches only estates above the federal exclusion.

Do retirement accounts get a step-up in Virginia?

No. Traditional IRAs and 401(k)s are income in respect of a decedent, so they do not receive a basis step-up. Beneficiaries owe ordinary income tax on withdrawals.

Does the Virginia probate tax change my basis?

No. Virginia charges a probate tax of about 10 cents per $100 of estate value (roughly $1 per $1,000) on estates over $15,000 when a will is admitted or administration is granted (Va. Code 58.1-1712). It is a recording tax paid to the Clerk, and it does not change your income-tax basis.

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.

Related Virginia Guides

Sources

Last Updated: July 2026. This guide provides general information about the step-up in basis for Virginia inherited property. Tax situations vary by individual. Consult a tax professional or estate planning attorney for advice specific to your situation. It is not legal advice.