Basis step-up can ease taxes on inherited farm assets

By Grace Kim

Code Section 1014 generally resets the basis of assets owned by a decedent to current fair market value at death, a tax rule the Nov. 4, 2026 explanation calls one of the most valuable estate-planning tools.

The explanation states: “Code Section 1014 provides that the basis of assets owned by a decedent step up to the current fair market value on death.” The rule covers both assets that appreciated and property depreciated in the course of business.

It also says: “Assets that have stepped up in basis will transfer without the recognition of capital gain or income.” For an operating farm, that treatment can determine the tax cost of transferring grain, crops, livestock and equipment to a surviving family member.

Which assets do not receive the step-up?

• Individual retirement accounts and 401(k) plans do not qualify, and beneficiary distributions are fully taxable.
• Deferred annuities do not qualify because they may appreciate during the decedent’s lifetime without recognition of gain or income; beneficiaries recognize income when the accounts are distributed.
• Income in respect of the decedent does not qualify.
• Examples include unpaid employment earnings, deferred grain contracts, installment payments, unpaid interest or dividends, unpaid rent and uncollected accounts receivable.

These amounts remain taxable to the beneficiary because the decedent earned them but had not collected them. For farm families, that rule connects basis treatment to collection timing on grain contracts, rent and receivables.

When does a lifetime gift still qualify?

Assets given away before death, including gifts to irrevocable trusts, generally do not receive a step-up. The decedent’s basis carries over to the beneficiary.

In some cases, however, a gift transfer or trust can be designed so the gifted asset remains included in the decedent’s taxable estate under Code Section 2036 for estate-tax calculations. The asset then receives a step-up upon the decedent’s death.

That exception means a lifetime gift cannot be judged by the transfer date alone. Estate inclusion, not the gift itself, can restore the basis reset.

Why does joint ownership matter on a farm?

In non-community-property states, only the portion of a jointly owned asset owned by the decedent receives a step-up. If spouses jointly own the farm operation, including grain, equipment, inputs, crops and livestock, and the farming spouse dies, the assets receive only a half-step-up in basis.

If the non-farming spouse then liquidates the assets, the explanation says the survivor will pay income taxes on half of the grain, crops and livestock. The survivor also will owe recaptured income on half of the depreciated equipment and expensed inputs.

Those charges can reduce the after-tax proceeds available from a crop or livestock sale and alter the economics of liquidating equipment or recovering expensed input costs. The source presents the example as a way joint ownership can limit the full basis reset.

Can full ownership preserve the full step-up?

Yes, according to the explanation. If the farming spouse holds full ownership of the farming operation’s assets, those assets would receive a full step-up in basis at death, and the surviving spouse would avoid income taxes on their liquidation.

That outcome makes the ownership of operating assets a central estate-planning question for farm families. Reviewing title before death can preserve more of the value of grain, crops, livestock, equipment and inputs than a structure that produces only a partial reset.

Going forward, families should examine which operating assets are jointly owned, whether any lifetime gift remains included in the taxable estate, and how retirement or deferred annuity assets will pass. Those choices can produce a full, partial or no basis step-up and materially change after-tax farm proceeds.