That is a condition to use the stepped up basis ....
If the property was included into the decedent's estate according to your state law - that property gets stepped up basis.
If the property was NOT included into the decedent's estate according to your state law - no stepped up basis...
Live estate ONLY affect the situation if that was a retained life estate and the property is included into the estate.
Regarding the basis - following sections would apply
1. Under IRC section 1014(b)(9) - any property that is required to be included in the value of a decedent's gross estate for estate tax purposes shall receive a stepped-up
9) In the case of decedents dying after December 31, 1953, property acquired from the decedent by reason of death, form of ownership, or other conditions (including property acquired through the exercise or non-exercise of a power of appointment), if by reason thereof the property is required to be included in determining the value of the decedent’s gross estate under chapter 11 of subtitle B or under the Internal Revenue Code of 1939. In such case, if the property is acquired before the death of the decedent, the basis shall be the amount determined under subsection (a) reduced by the amount allowed to the taxpayer as deductions in computing taxable income under this subtitle or prior income tax laws for exhaustion, wear and tear, obsolescence, amortization, and depletion on such property before the death of the decedent. Such basis shall be applicable to the property commencing on the death of the decedent.
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