Updated July 29, 2026. Quick answer: It runs both directions. IRC §1014(a)(1) sets basis at “the fair market value of the property at the date of the decedent’s death” — no floor, no election, no greater-of. An asset that has fallen below its basis takes the lower figure, and the unrealised loss disappears permanently.
Why nobody plans for this
The phrase “step-up in basis” has done real damage here, because it describes only the case people expect. The regulation states the purpose plainly: to provide a basis “equal to the value placed upon such property for purposes of the federal estate tax.” Equal — not higher.
| At death the asset is | Result |
|---|---|
| Worth more than basis | Basis rises; the gain is never taxed |
| Worth less than basis | Basis falls; the loss is destroyed |
The planning consequence is the opposite of the usual advice. The standard instinct is to hold appreciated assets until death and harvest losses along the way. This makes the second half urgent rather than optional: an unrealised loss held to death is simply forfeited, where a realised one could have offset gains or carried forward. Losses are the thing you should not hold for the step-up.
Where it bites hardest
A concentrated position bought high and never sold, and in a community property state the effect is doubled — because both halves are adjusted, both halves step down. The rule that helps most on the way up hurts most on the way down.
Sources
IRC §1014(a), (b)(6), (c) and (e); Treas. Reg. §1.1014-1(a) and §1.1014-2(a)(5); IRC §2040(b); IRC §691. State law as cited on each page from the state’s own codified statutes. The nine-state list is attributed to IRS Internal Revenue Manual 25.18.1.2.3 and Publication 555 rather than to fifty separate statutes. All read July 2026.
This states what the cited authority says. It is not tax advice, and retirement-plan design turns on facts about your business and your other entities that no page can see. Every dollar limit referenced here is indexed and changes annually.