Capital Gains on Inherited Property in California: Stepped-Up Basis

One of the most common worries heirs bring up is capital gains. “My parents bought this house for $60,000 and it’s worth $900,000 — am I going to owe tax on $840,000?” Almost always, no. The stepped-up basis rule is one of the more favorable provisions in the tax code, and understanding it changes how you think about selling an inherited home.

How Stepped-Up Basis Works

When you inherit property, your cost basis is generally “stepped up” to the fair market value as of the date of the decedent’s death, rather than what they originally paid. The appreciation that happened during their lifetime is not taxed to you.

Using the example above: if the home was worth $900,000 on the date of death and you sell it for $915,000 a few months later, your taxable gain is roughly $15,000 minus selling costs — not $840,000. In many cases selling costs exceed the appreciation and the gain is effectively zero.

Community Property Can Double the Step-Up

California is a community property state, and this matters when the first spouse dies. Property held as community property generally receives a full step-up on both halves at the first spouse’s death, not just the deceased spouse’s half. In common-law states, typically only the decedent’s half steps up.

The practical consequence is meaningful: a surviving spouse in California may be able to sell shortly after with very little capital gains exposure, where the same situation elsewhere would produce a substantial bill. Whether this applies depends on how title was held, so have a CPA confirm it rather than assuming. Checking the recorded deed is worth doing early for another reason too: where a living trust was signed but the house was never deeded into it, the family typically needs a court order confirming the house as trust property before they can sell at all.

Get a Date-of-Death Valuation

This is the single most important practical step, and heirs skip it constantly. Your stepped-up basis is a number you will have to substantiate if the IRS ever asks, and reconstructing a property’s value years after the fact is difficult and expensive.

Order a formal appraisal as of the date of death, from a licensed appraiser, and keep it. A Zillow estimate is not documentation. If probate is involved, the court-appointed probate referee typically produces a valuation, which serves this purpose.

Holding Changes the Picture

The step-up locks in value as of the date of death. Appreciation after that point is yours and is taxable when you sell. Selling reasonably soon after inheriting generally minimizes capital gains exposure. Holding for years means real gains accumulate, and if you rent the property in the meantime, depreciation recapture enters the picture too.

Inherited property also generally receives long-term capital gains treatment regardless of how briefly you held it, which is favorable relative to short-term rates.

Don’t Confuse This With Property Tax

These are two separate systems and heirs mix them up constantly. Stepped-up basis is federal, and it governs capital gains. Proposition 19 is California property tax, and it governs your annual assessment. Prop 19 narrowed the parent-child exclusion significantly, so an inherited home you do not move into will likely be reassessed to market value — a much higher annual bill — even though your capital gains exposure on a sale is small. Both facts can be true at once.

This article is general information rather than tax advice, and the rules have exceptions that depend on how title was held and how the estate is structured. Talk to a CPA before selling. If a no-obligation cash offer would help you weigh timing, Cash Home Buyers CA can provide one at no cost.