Understanding the "Step-Up Basis" in Real Estate
When a loved one passes away and leaves behind a home, the person who inherits it may not just gain property—they could also gain a valuable tax benefit known as a step-up in basis.
In simple terms, a step-up in basis allows the value of the inherited property to be “reset” to its fair market value at the time of inheritance, rather than keeping the original purchase price (or basis) the previous owner paid.
This matters because it can dramatically reduce—or eliminate—capital gains taxes if the inheritor later decides to sell the property.
How it Works
Let’s say:
- Your parents bought a home in San Jose for $200,000 in 1990.
- They pass away in 2025, and the home is now worth $1.5 million.
- You inherit the home and decide to sell it soon after for that $1.5 million.
Without a Step-Up in Basis:
- You’d be taxed on the capital gains between $1.5 million and $200,000—a $1.3 million gain.
With a Step-Up in Basis:
- Your new cost basis becomes $1.5 million (the fair market value at time of death).
- You sell at $1.5 million = $0 in taxable capital gains.
This can save heirs hundreds of thousands of dollars in taxes.
When Does a Step-Up in Basis Apply?
- Applies to most inherited assets, including real estate, stocks, and other investments.
- Effective only upon the death of the original owner.
- The property must be in the decedent’s estate at the time of death.
Important:
The step-up is not available for gifts made while the owner is still alive (those use the original basis)
Community Property Bonus for Married Couples in California
- California is a community property state, which offers an added benefit.
- When one spouse passes away, the entire property not just the deceased spouse’s half receives a full step-up in basis.
- This means the surviving spouse can sell the home with minimal or no capital gains tax, even if the property has significantly appreciated over time.
How This Ties into Proposition 19
While Proposition 19 (passed in 2021) changed the rules around property tax transfers and inheritance, it did not eliminate the step-up in basis.
So, even if inherited homes no longer get to keep their low property tax base unless used as a primary residence, the step-up in basis for capital gains tax still applies under federal law.
In other words: your property taxes might go up, but your capital gains tax may be minimized or erased altogether.
FAQs About Step-Up in Basis
- Does the step-up apply if I keep the home instead of selling?
- Yes. The new basis is still stepped-up, which means any future sale will only trigger gains based on appreciation after the date of death.
2. What if the property continues to increase in value after I inherit it?
- Any appreciation after the date of death is subject to capital gains tax if and when you sell.
3. Can I get an step-up on a rental or a vacation home?
- Yes—as long as it was part of the decedent’s estate at the time of death.
Final Thoughts: Why This Matters for California Families
If you own a home—or expect to inherit one in the future—the step-up in basis is a powerful tax advantage to understand.
It can:
- Save families thousands in capital gains taxes 💰
- Allow more flexible decisions about keeping or selling inherited property 🏠
- Help with estate planning, especially when passing down real estate 📜
Whether you’re planning your estate or navigating a recent inheritance, talk with a real estate professional and tax advisor to make sure you’re using this benefit wisely.
Related Resources:
👉Learn More About Proposition 19
👉 Prop 19 Frequently Asked Questions
👉 Learn More About 1031 Exchange
👉 Connect Today to Discuss Your Options
