When you inherit California real estate, its tax starting point is generally reset to what the property was worth on the day the owner died, not what the owner paid for it. That reset is the step-up in basis. When you sell, any taxable gain is generally measured from that date-of-death value. Appreciation during the owner's lifetime is not counted.
California property guideUpdated October 17, 2026General information, not legal or tax advice
Most people facing this question have just learned that the house a parent bought decades ago is now theirs, alone or with siblings. Usually someone has warned them about a large tax bill if they sell. They want to know whether that warning is true before they agree to a listing, an offer or a plan to keep the house. This page explains how basis works for inherited California property, which facts change the answer, and where the federal income-tax rule ends and California's property-tax rules begin.
What the Step-Up in Basis Rule Means
Basis is the starting value used to figure gain or loss when property is sold. If a property sells for more than its basis, the difference is gain. If it sells for less, the difference is a loss.
For inherited property, the federal rule is 26 U.S.C. § 1014. Under 26 U.S.C. § 1014(a), the basis of property acquired from a decedent is generally "the fair market value of the property at the date of the decedent's death." The statute gives three alternatives:
a value at the alternate valuation date, if the estate elects it under 26 U.S.C. § 2032
a value set under the special-use rules of section 2032A
the decedent's own basis, to the extent a conservation-easement exclusion applies
Fair market value means, in practice, what the house would have sold for on that date between a willing buyer and a willing seller.
When the house gained value over the owner's life, the basis steps up. When the house was worth less at death than the owner paid, the same rule steps the basis down to the date-of-death value. The rule covers property acquired from a decedent. It does not cover gifts made during life, as later sections explain.
How Basis Is Determined at the Date of Death
An appraisal of the property as of the date of death is the usual way to establish fair market value. In a California probate, that appraisal is already part of the process. Under Probate Code section 8800, the personal representative must file an inventory and appraisal with the court clerk. The personal representative is the executor named in a will or the administrator the court appoints. The filing is due within four months after letters are first issued to a general personal representative, or within any further time the court allows as reasonable. Under Probate Code section 8902, a probate referee appraises the property that the personal representative does not appraise, except as a statute provides otherwise.
The alternate valuation date is an option the executor elects on the federal estate tax return. Under 26 U.S.C. § 2032, the election is available only if it decreases both the value of the gross estate and the estate tax and related tax. The IRS's Gifts & inheritances FAQ says this value applies only if the executor files Form 706 and elects it on that return.
Basis is fixed as of the death, not the day a deed is recorded or a sale closes. When an estate files Form 706, the IRS's Publication 551, Basis of Assets says beneficiaries generally receive a Schedule A (Form 8971), and certain beneficiaries must use the value it reports. A CPA, an enrolled agent or a tax attorney reviews basis and income-tax questions on the actual facts.
California Community Property and the Double Step-Up
California is a community property state. Property a married couple acquires during the marriage is generally community property, which each spouse is usually considered to own half of. The federal code gives this property a special rule. Under 26 U.S.C. § 1014(b)(6), the surviving spouse's one-half share of community property is treated as acquired from the decedent. This applies if at least half of the whole community interest was includible in the decedent's gross estate.
People call the result the double step-up. IRS Publication 551 explains that when either spouse dies, the total value of the community property, including the survivor's half, generally becomes the basis of the entire property. A home owned by spouses in a state without community property works differently. When it is held in joint tenancy or as tenants in common, generally only the decedent's share is included in the estate and stepped up. The survivor's share keeps its old basis. The same is generally true of co-owners who are not spouses, such as two siblings on one deed.
This is why how title was held matters. Title might be held as community property, in joint tenancy, as tenants in common or in a trust. The recorded deed shows how title was held, and the county recorder's or assessor's office is the place to obtain a copy. Applying the right rule to that deed is income-tax work for a CPA or a tax attorney.
Trusts and the Step-Up: Revocable, Irrevocable, and Transfer on Death Deeds
A revocable living trust is generally treated as if the owner still held the house. Under 26 U.S.C. § 1014(b)(2) and (3), property transferred in trust during life counts as acquired from the decedent. This applies when the decedent kept, at all times before death, the right to revoke the trust or to change it through a power to alter, amend or terminate. Property in such a trust at death generally receives a basis at its date-of-death value. The successor trustee is the person who takes over managing the trust after the owner dies. A sale by the successor trustee generally starts from that value.
Irrevocable trusts are less predictable. A house moved into an irrevocable trust during the owner's life may have left the owner's estate before death. If so, it may not step up. Under 26 U.S.C. § 1014(b)(9), property acquired by reason of death, form of ownership or other conditions counts when it is required to be included in the decedent's gross estate. Whether a given irrevocable trust meets that test turns on several facts: how the trust is written, when it was funded and what rights the owner kept.
California's transfer on death deed passes real property to a named person at the owner's death, outside probate. Because the owner could revoke it until death, the property is generally included in the estate and steps up. A CPA or a tax attorney reviews the trust or deed itself before anyone relies on that result.
What Assets Do Not Receive a Step-Up in Basis
Section 1014 reaches property acquired from a decedent. That includes real property, stocks and other capital assets included in the estate. Several kinds of assets fall outside it.
Income items. Under 26 U.S.C. § 1014(c), the rule does not apply to a right to receive an item of income in respect of a decedent. That term means income the decedent had earned or was owed but had not yet been taxed on. Payments from tax-deferred retirement accounts, such as IRAs and 401(k)s, and from many annuities are often treated this way. They are not stepped-up property.
Gifts made during life. A house given away while the owner was alive was not inherited. Its basis is figured under different rules and is not reset at the giver's later death.
Gifts returned at death. Under 26 U.S.C. § 1014(e), a special rule applies to appreciated property the decedent received as a gift within one year before death. If that property passes back to the person who gave it, or to that person's spouse, it keeps the decedent's adjusted basis from immediately before death.
This page concerns real property. How a particular account or annuity is taxed is a question for a CPA or a tax attorney.
The Step-Up in Basis and California Property Tax Reassessment
Two separate systems apply to an inherited house. The step-up is a federal income-tax rule about gain on a sale. Property tax is a California system run by each county assessor under the California Constitution and the Revenue and Taxation Code.
A death can trigger a change in ownership for property-tax purposes. Rev. & Tax. Code section 60 defines that as a transfer of a present interest in real property, including its beneficial use, whose value is substantially equal to the value of the fee interest. A change in ownership can lead the assessor to reassess the property to current value.
Rev. & Tax. Code section 480 requires a change in ownership statement after a death:
In probate: the personal representative files it with the county recorder or assessor before or at the time the inventory and appraisal is filed.
In other cases, including transfers through a trust: the trustee or the person receiving the property files it within 150 days after the date of death.
Proposition 19 reshaped the parent-child exclusion. Under Rev. & Tax. Code section 63.2, beginning on and after February 16, 2021, a transfer of a parent's principal residence to a child may be excluded from reassessment, in whole or in part. The same exclusion can apply between grandparents and grandchildren if all of the grandchild's parents who are the grandparents' children are deceased. Several conditions apply:
The house must become the child's principal residence within one year of the transfer.
The child must file for the homeowners' or disabled veterans' exemption within a year.
A value above a set limit is added to the taxable value.
Rev. & Tax. Code section 63.2 also governs the timing of the claim, and the exclusion is not automatic. The claim is generally due within three years after the transfer, or before a transfer to a third party, or before an eligible transferee stops occupying the residence, whichever is earliest. A filing within six months after a notice of supplemental or escape assessment is mailed is deemed timely. The value limit is adjusted over time. The county assessor's office publishes the current figure and handles these claims. The IRS and the Franchise Tax Board do not.
Common Mistakes with Stepped-Up Basis
Several errors come up repeatedly when an heir sells inherited property. Each one follows from a rule described above.
Starting from the purchase price. Measuring gain from what the decedent paid, rather than from the date-of-death value, can overstate the gain.
Assuming a double step-up for joint tenancy. When spouses held title in joint tenancy rather than as community property, the double step-up may not apply.
Skipping the appraisal. Without an appraisal as of the date of death, an heir may later be unable to document basis to the IRS or the Franchise Tax Board. IRS Publication 551 says that if no Schedule A was received, basis can be determined using the appraised value at the date of death for state inheritance or transmission tax purposes.
Merging two systems. The income-tax step-up and the Rev. & Tax. Code section 63.2 exclusion are separate rules with separate filings.
Treating every trust alike. Whether property in an irrevocable trust steps up depends on the trust's structure.
Confusing gifts with inheritances. A house received as a gift during life does not take a date-of-death basis.
Selling Inherited Property: How the Step-Up Affects What You Owe
For a family deciding whether to sell, this is where the rule becomes practical. Gain on the sale is generally the price received minus the stepped-up basis. Allowable selling costs may also reduce it. The original purchase price is not part of the calculation. The IRS FAQ says it plainly: "If you sell the property for more than your basis, you have a taxable gain." When a house sells for close to its date-of-death value, the gain may be small or there may be none. Whether a particular sale owes tax depends on the actual figures.
Timing matters in one specific way. Under 26 U.S.C. § 1223(9), an heir whose basis is set by section 1014 and who sells within one year after the death is considered to have held the property for more than one year. IRS Publication 559, Survivors, Executors, and Administrators adds that the gain or loss on inherited capital assets is long term regardless of how long you held the property. That publication also notes that when the estate itself sells the decedent's former residence during administration, it may be treated as a capital asset held for investment. Commissions, closing costs and some repairs may reduce the gain. California income-tax questions belong to the Franchise Tax Board. A CPA or a tax attorney reviews what is deductible.
The tax rules are the same whoever the buyer is. A listing compared with a cash offer is a question about net proceeds, not tax. A direct offer is often lower than an open-market price, because the buyer takes on repairs, risk and the cost of reselling. In exchange, the seller handles less preparation, fewer showings and less reliance on a buyer's loan. Authority to sell comes first. In a probate, that means letters and the court's steps for selling during probate. Condition questions, such as a house that needs repairs, affect price, not basis. Comparing written offers and estimated net proceeds is how a family sees which way fits.
When you’re ready
You Don’t Have to Work This Out Alone
If you’re dealing with the step-up in basis for inherited property, we’re here to talk it through.
Every inherited property is different. Call or send us a message, and we’ll listen. A direct offer is often lower than what the open market might bring, and asking for one does not commit you to selling.
2Tell us what’s going onAbout the property, in your own words.
3Talk through your optionsThen decide, in your own time, what comes next.
Frequently Asked Questions
Do I have to pay capital gains tax on an inherited property?
It depends on whether the sale price exceeds your stepped-up basis, which is generally the date-of-death value. A sale near that value may produce little or no gain. A CPA or a tax attorney can say whether your particular sale owes tax.
What is the step-up in basis loophole?
"Loophole" is a casual name for 26 U.S.C. § 1014(a), which sets inherited property's basis at its date-of-death value. Appreciation during the decedent's life is therefore not taxed as gain when an heir sells. It is a written part of the tax code, not a workaround.
What assets get a step-up in basis at death?
Property acquired from a decedent generally does, including real estate and stocks included in the estate. Property in a revocable trust generally qualifies too, as described in the trusts section above.
What assets do not get a step-up in basis?
Items of income in respect of a decedent do not. These often include tax-deferred retirement accounts and annuities. Gifts made during life also do not step up, and neither does appreciated property given to the decedent within a year of death that passes back to the giver. A CPA reviews specific assets.
Does a step-up in basis apply to property held in a trust?
For a revocable living trust, generally yes. An irrevocable trust is different: the answer depends on how it is written, when it was funded and what rights the owner kept. A CPA or a tax attorney reviews the trust document.
How does the step-up in basis work for jointly owned property between spouses in California?
Community property can step up on both halves when one spouse dies, if the federal conditions described above are met. Title held in joint tenancy generally steps up only on the decedent's share. The recorded deed shows which form of title applies.
What is the one-year rule for step-up in basis?
Under 26 U.S.C. § 1223(9), inherited property sold within a year after the death is treated as held for more than one year. That makes any gain long term. A CPA applies the current rates.
What are common mistakes with stepped-up basis?
The usual ones are using the decedent's purchase price as basis and assuming joint tenancy steps up both halves. Others include having no date-of-death appraisal and mixing up the income-tax rule with California's reassessment exclusion. The mistakes section above walks through each.
