# Upstream basis step-up: erasing built-in gain through the older generation, cross-border too > How IRC §1014 resets the basis of inherited assets to date-of-death fair market value, why the step-up reaches a nonresident alien's foreign assets (Rev. Rul. 84-139), and where the §1014(e) one-year rule bites. Author: Алёна Дунаева — юрист, Family Office (https://wiki.private.law/authors/dunaeva) Last modified: 2026-06-15T15:02:00.000Z Canonical: https://wiki.private.law/en/upstream-basis-step-up Topics: investments Jurisdictions: usa Semantic tags: wealth-planning --- **Lawyer, Family Office** --- # Concept Step-up in basis is one of the most valuable reliefs in the US tax code and the one people plan for least. Section §1014 of the Internal Revenue Code says something simple: when a person dies, the basis of their assets in the heir's hands is reset to fair market value at the date of death. The entire gain that built up during life is no longer exposed to capital gains tax — it simply disappears. This is usually discussed within a single generation: children inherit from parents. But §1014 makes no reservation about the decedent's citizenship or about whether any US estate tax was paid. That is where a technique known as upstream planning comes from — deliberately routing an asset with a large built-in gain to an older relative, so that after their death it comes back down with the gain wiped clean. The technique has two layers, and both rest on the text of the code. The first is who counts as having «acquired property from a decedent»: that is §1014(b)(1), the path through bequest, devise or inheritance. The second is the limiter that stops the technique from becoming a pure scheme: §1014(e), the «one-year rule». They are worth taking in order, because it is precisely at the seam between these two provisions that things break for those who act in haste. > 🍓 §1014 resets the basis of inherited assets to fair market value at the date of death — the built-in gain is no longer exposed to tax. The rule works even for the foreign assets of a non-US decedent (a nonresident alien, NRA), even where no US estate tax was paid: this is confirmed directly by Rev. Rul. 84-139. But §1014(e) cancels the step-up if an asset gifted to the dying person returns to the same donor within a year. And separately: the US step-up is invisible to the heir's country of residence — local CGT will be charged on its own, un-reset basis. # The base rule of §1014 Under §1014(a) the basis of property received from a decedent equals its fair market value at the date of death (or at the alternate valuation date, if the executor elects it). If a grandmother bought shares for $50k and they are worth $2m on the day she dies, the heir takes them with a $2m basis. Sell the next day for $2m and the taxable gain is zero. The very $1.95m that would otherwise have hung over the asset as a tax tail is wiped out. ## Who counts as taking from the decedent The key hook is §1014(b)(1): property passing by will (bequest, devise) or by operation of law (inheritance). It is the broadest and most reliable of the §1014(b) paths. Importantly, the provision describes the manner of transfer, not the decedent's status or the location of the asset: neither US citizenship of the deceased nor payment of estate tax is among the conditions. # The cross-border twist: a foreign relative's assets Here lies the most underappreciated consequence. Picture an American whose elderly parent — a nonresident, non-citizen of the US (a nonresident alien, NRA) — owns real estate or a portfolio outside the States. Those assets fall outside the US tax orbit in the first place: the gross estate of a non-US person includes only US-situs property under §2103. Intuition suggests that if no estate tax is paid, there is nowhere for a step-up to come from. Intuition is wrong. ## Why the step-up works without estate tax §1014 does not condition the basis reset on the asset being included in the gross estate. It is enough that the property was «acquired from a decedent» by one of the §1014(b) paths — and inheritance under §1014(b)(1) meets that test. The IRS confirmed this back in Rev. Rul. 84-139: foreign real property inherited by a US citizen from an NRA receives a step-up under §1014(a)(1) and (b)(1), even though it was never in the gross estate and bore no estate tax. So a gain that compounded abroad for decades is wiped clean for the purposes of a future US sale — with no offsetting US tax on entry. # §1014(e): the one-year rule The obvious temptation is not to wait for nature to take its course but to «route» the asset upward yourself: gift heavily appreciated securities to an elderly relative in order to get them back shortly with a clean basis. §1014(e) is written precisely against this. If appreciated property is gifted to the decedent within one year before death and then returns to the donor (or the donor's spouse), no step-up is granted — the basis stays the decedent's prior carryover basis. > A subtlety often missed: §1014(e) only strikes at the asset returning to the same donor or their spouse. If the decedent's will sends the property to a different beneficiary — say, to the donor's children rather than the donor themselves — the ordinary step-up survives. So what breaks the technique is not the gift to the older generation as such, but looping the asset back to the donor within the year. The practical takeaway is both mundane and important: either rely on natural inheritance that was not engineered right before death, or structure the testamentary distribution so the asset does not return to the very person who passed it up. And keep distance in time — the §1014(e) year runs from the date of the gift to the date of death. # Application The technique fits where a family has an older generation and assets with a large built-in gain that the heir plans to sell in the foreseeable future. It shines in the cross-border family: an American with an NRA parent and foreign assets gets a rare combination — zero estate tax on entry (the asset is outside the US orbit) and a full step-up on exit. It also works in purely domestic settings, but there one has to keep the decedent's estate tax in mind where the estate exceeds the exemption threshold. # Risks > ⚠️ The main trap is the cross-border asymmetry. §1014 resets basis for US tax purposes. The country where the heir is tax resident (the United Kingdom, many EU jurisdictions and so on) computes the gain under its own rules and does not recognise the US step-up: on a sale it will charge CGT on its own, un-reset basis. The second trap is §1014(e): an asset gifted and returned to the donor within the year erases the entire benefit. The third is compliance: receiving an inheritance from a foreign person above the threshold requires Form 3520, and the foreign assets themselves require FBAR and Form 8938. It is also worth remembering that a step-up is a reset of basis, not a release from the decedent's existing obligations, and that the alternate-valuation election and other technical forks of §1014 are best worked through with the numbers in front of you rather than from memory. # FAQ Short answers to what cross-border families ask most often. ### My parent is neither a US citizen nor a US resident, and their assets are abroad. Will I get a step-up? Yes. §1014 does not require the decedent to be American or the asset to enter the US gross estate. It is enough that you receive the property by inheritance (bequest/inheritance, §1014(b)(1)) — the basis becomes fair market value at the date of death. For foreign real property from an NRA this is confirmed directly by Rev. Rul. 84-139. ### Can I gift my appreciated shares to a parent and later get them back with a clean basis? Technically yes, but §1014(e) will defeat the plan if the asset returns to you (or your spouse) within one year of the gift — the basis then stays the prior carryover. If the parent lives more than a year after the gift, or the will sends the asset not to you but, say, to your children, the §1014(e) limit does not bite. ### Does the step-up also free me from tax in the country where I live? No. §1014 operates only within the US tax system. If you are tax resident in a country that taxes worldwide capital gains, it will compute the tax on a sale using its own basis and will not recognise the US reset. So the cross-border effect must be modelled on both sides of the border. ### Do I have to report anything in the US when I receive a foreign inheritance? The step-up itself requires no filing, but receiving a large inheritance or gift from a foreign person is reported on Form 3520, and holding foreign accounts and assets is reported on the FBAR (FinCEN 114) and Form 8938. These are information returns; missing them is penalised regardless of whether any tax was due. ### Does the step-up apply to any asset or only to real estate? To assets generally — shares, interests, portfolios, real estate. Rev. Rul. 84-139 addressed foreign real estate specifically, but the logic of §1014(a)(1) and (b)(1) is not tied to the asset class. Certain categories (for example, income in respect of a decedent) do not qualify for a step-up and should be checked on their own. --- --- ## FAQ ### My parent is neither a US citizen nor a US resident, and their assets are abroad. Will I get a step-up? Yes. §1014 does not require the decedent to be American or the asset to enter the US gross estate. It is enough that you receive the property by inheritance (bequest/inheritance, §1014(b)(1)) — the basis becomes fair market value at the date of death. For foreign real property from an NRA this is confirmed directly by Rev. Rul. 84-139. ### Can I gift my appreciated shares to a parent and later get them back with a clean basis? Technically yes, but §1014(e) will defeat the plan if the asset returns to you (or your spouse) within one year of the gift — the basis then stays the prior carryover. If the parent lives more than a year after the gift, or the will sends the asset not to you but, say, to your children, the §1014(e) limit does not bite. ### Does the step-up also free me from tax in the country where I live? No. §1014 operates only within the US tax system. If you are tax resident in a country that taxes worldwide capital gains, it will compute the tax on a sale using its own basis and will not recognise the US reset. So the cross-border effect must be modelled on both sides of the border. ### Do I have to report anything in the US when I receive a foreign inheritance? The step-up itself requires no filing, but receiving a large inheritance or gift from a foreign person is reported on Form 3520, and holding foreign accounts and assets is reported on the FBAR (FinCEN 114) and Form 8938. These are information returns; missing them is penalised regardless of whether any tax was due. ### Does the step-up apply to any asset or only to real estate? To assets generally — shares, interests, portfolios, real estate. Rev. Rul. 84-139 addressed foreign real estate specifically, but the logic of §1014(a)(1) and (b)(1) is not tied to the asset class. Certain categories (for example, income in respect of a decedent) do not qualify for a step-up and should be checked on their own. --- ## Factual claims - Lawyer, Family Office - Under §1014(a) the basis of property received from a decedent equals its fair market value at the date of death (or at the alternate valuation date, if the executor elects it). - The key hook is §1014(b)(1): property passing by will (bequest, devise) or by operation of law (inheritance). - §1014 does not condition the basis reset on the asset being included in the gross estate.