Step-Up in Basis at Death: How U.S. Inherited Property Gets a New Cost Basis, and Why Japan Does It Differently

If you have inherited U.S. stocks or real estate from a parent in Japan, or you live in the U.S. and are about to sell the family home you inherited in Japan, one difference between the two tax systems will shape your outcome more than any other: how each country determines the cost basis of inherited property. The United States steps the basis up to fair market value at death. Japan carries over the decedent’s original cost. This article explains both rules, walks through the cross-border situations where they collide, and lists the practical steps that keep the mismatch from turning into double taxation. Figures are as of 2026.

The U.S. Step-Up in Basis (Section 1014)

Under Internal Revenue Code Section 1014, property acquired from a decedent (by will, intestacy, or survivorship in a joint tenancy, among other routes) takes a basis equal to its fair market value on the date of death. If the estate elects the alternate valuation date, the value six months after death is used instead.

• Built-in gain disappears: stock bought for $100,000 and worth $500,000 at death gives the heir a $500,000 basis. A sale shortly afterward produces little or no taxable gain.
• Losses disappear too: if the asset is worth less than the decedent paid, the basis steps down to fair market value.
• Holding period is automatically long-term, so any later sale qualifies for the 0%, 15%, or 20% long-term capital gains rates regardless of how long the heir held the asset.
• No step-up for income in respect of a decedent (IRD): traditional IRAs, 401(k) balances, unpaid salary, and similar items are taxed as ordinary income when the heir receives them.
• Lifetime gifts carry over basis (Section 1015). Giving away highly appreciated assets during life forfeits the step-up the heir would otherwise have received.

Married couples and state law

In New York and most other states, only the deceased spouse’s share of jointly owned property (generally one half) receives a step-up. In community property states such as California, Texas, and Washington, the entire community asset steps up, often called the double step-up. If the surviving spouse is not a U.S. citizen, jointly held property is included in the decedent’s estate in proportion to the decedent’s contributions (Section 2040(a)) rather than the automatic 50% rule that applies to citizen spouses, which changes both the estate tax calculation and the portion that steps up.

Japan’s Carryover of Acquisition Cost (Income Tax Act Article 60)

Japan takes the opposite approach. An heir who sells inherited property calculates the gain using the decedent’s original acquisition cost and acquisition date. The built-in gain does not disappear at death; it is simply deferred until the heir sells. Because the heir may have already paid inheritance tax on the same asset, a relief provision (Special Taxation Measures Act Article 39) allows part of the inheritance tax paid on that asset to be added to its cost if the sale occurs within three years after the inheritance tax filing deadline. Where the original cost cannot be documented, Japan permits a deemed cost of 5% of the sale price, which for long-held assets produces a very large taxable gain.

Item	United States (Section 1014)	Japan (Article 60)
Basis of inherited asset	Fair market value at death (stepped up or down)	Decedent’s original cost carried over
Holding period	Automatically long-term	Runs from the decedent’s acquisition date
Built-in gain	Effectively eliminated at death	Taxed when the heir sells
Relief	Not needed	Inheritance tax added to cost for sales within the window
Excluded assets	IRD (IRAs, 401(k)s, unpaid wages)	Limited acceptance estates and certain special assets

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Three Cross-Border Scenarios

Scenario 1: A Japan-resident parent leaves U.S. stocks or real estate to a Japan-resident child

On the U.S. side, the U.S.-situs assets of a nonresident alien decedent are subject to U.S. estate tax with an exemption of only $60,000 in principle, although the U.S.-Japan estate tax treaty can increase the available credit. If the heir is also a nonresident alien, a later sale of the U.S. stock is generally not taxed by the United States. A sale of U.S. real estate is taxed in the U.S., but the basis is the date-of-death value. In Japan, the heir pays inheritance tax and, on a later sale, calculates the gain using the parent’s carried-over cost.

Scenario 2: A U.S. citizen or green card holder inherits Japanese assets from a parent in Japan

For U.S. purposes, property inherited from a nonresident alien receives a fair-market-value basis under Section 1014(b)(1), even though it was never subject to U.S. estate tax (Rev. Rul. 84-139). If the heir later sells the family home in Japan, the U.S. gain is small. Japan, however, taxes nonresidents on the sale of Japanese real estate and uses the parent’s carried-over cost (or the 5% deemed cost), so the Japanese gain is large. The result is a mismatch: substantial tax in Japan, minimal tax in the U.S., and a foreign tax credit on Form 1116 that may not be large enough to absorb the Japanese tax, leaving some double taxation in place. Inheritances of more than $100,000 from a nonresident alien must also be reported on Form 3520.

Scenario 3: A U.S. resident inherits U.S. assets, but one heir lives in Japan

The U.S. step-up applies normally. Japan, however, imposes inheritance tax based primarily on the heir’s residence, so a Japan-resident heir owes Japanese inheritance tax on the U.S. assets he or she receives. When that heir later sells the U.S. stock, Japan computes the gain using the carried-over cost.

Practical Checklist

• Document date-of-death values: an appraisal for real estate and the average of the high and low trading prices on the date of death for listed securities. Brokerages can issue a date-of-death valuation on request.
• If a Form 706 or 706-NA is filed, the basis reported to heirs must be consistent with the estate tax value (Section 1014(f), Form 8971).
• Track basis in both currencies. Japan measures cost in yen and the U.S. in dollars, so exchange rate movements between the acquisition date and the sale can create very different gains in each country.
• Gift versus inheritance: for U.S. income tax purposes, holding appreciated assets until death is usually better than gifting them, but Japanese inheritance and gift tax must be weighed as well. For 2026 the U.S. estate tax basic exclusion is $15,000,000 for citizens and residents, the annual gift exclusion is $19,000 per recipient, and the annual exclusion for gifts to a non-citizen spouse is $194,000.

Frequently Asked Questions

I inherited stock in a U.S. brokerage account. What is my basis when I sell?

The fair market value on the date of death. The same rule applies to transfer-on-death accounts and joint accounts with right of survivorship. Some brokerages do not update the cost basis automatically, so ask for the date-of-death valuation to be applied and check the figures on Form 1099-B before filing.

I live in the U.S. and inherited my parents’ house in Japan, but nobody knows what they paid for it. What should I expect?

Japan will likely compute the gain using the 5% deemed cost, producing a large Japanese tax bill, while the U.S. gain will be small because your basis is the date-of-death value. Because the foreign tax credit is limited, it is worth modeling the timing of the sale and the credit carryforward with advisers in both countries before you sign a contract.

Would it be better to have my parents transfer the property to me now?

A lifetime gift carries over the donor’s basis for U.S. purposes, forfeiting the step-up, and gifts above the annual exclusion require a Form 709. Japan also imposes gift tax on the recipient. For highly appreciated assets, an inheritance is usually more tax-efficient, but the decision depends on both countries’ rules.

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This article is provided for general informational purposes only and does not constitute individual tax advice. Please review current IRS rules and Japanese tax law, and consult a qualified cross-border tax professional before making any decision.

Summary

The U.S. step-up in basis erases built-in gain at death, while Japan’s carryover rule defers it until the heir sells. In cross-border estates, this structural difference means the tax cost depends heavily on which country taxes the sale and who the seller is. Secure evidence of date-of-death values, keep basis records in both currencies, and model the foreign tax credit before selling. Those three steps prevent most of the double taxation that otherwise arises.

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