Inherited a Home in California? Here’s How Step-Up in Basis Affects Your Taxes
This is the single most reassuring thing I explain to families, and the one most people haven’t heard of before they inherit a home: selling an inherited house usually triggers much less capital gains tax than people assume — sometimes none at all.
The basic idea
When you buy an asset, your “basis” is generally what you paid for it. When you sell, you owe capital gains tax on the difference between your basis and the sale price. If your parents bought their San Francisco home in 1975 for $60,000, and it’s worth $1.4 million today, that $1.34 million gap looks like a massive taxable gain — and it would be, if they sold it themselves while alive.
But when a home is inherited, federal tax law generally resets the basis to the property’s fair market value on the date of death (or, in some cases, an alternate valuation date the estate can elect). This is called a “step-up in basis.”
What that means in practice
Using the example above: if the home was worth $1.4 million on the date of death, and the heirs sell it for $1.42 million a year later, the taxable gain is roughly $20,000 — not $1.36 million. The decades of appreciation that happened before the death are generally never taxed as capital gains at all. This is why selling relatively soon after inheriting a home often results in little to no capital gains tax.
A California-specific wrinkle: community property
California is a community property state, which matters here. For a married couple, when the first spouse passes away, community property can receive a full step-up in basis on both halves of the property — not just the half that belonged to the deceased spouse. This is more generous than the rule in most other states, where a surviving spouse typically only gets a step-up on the deceased spouse’s half.
What the probate referee's appraisal is for
During probate, a court-appointed probate referee appraises the estate’s real property as of the date of death. That appraisal is often the most useful evidence of fair market value at death — exactly the number that matters for calculating the stepped-up basis. Keeping that appraisal, along with records of any capital improvements and selling costs, makes tax time considerably easier.
*This page is a general educational overview and is not tax advice. Basis rules have important exceptions (including for property held in certain trusts, gifted property, or jointly held property outside of community property), and figures can change under state and federal law. A CPA or tax attorney should confirm how this applies to your estate.