Most people facing this question are in the middle of settling an estate. An adult child may be holding a parent's house and a stack of brokerage statements. A surviving spouse may be wondering what happens to the home the couple bought decades ago. A newly named executor may be fielding questions from siblings about what a sale will cost them in tax. The words "basis" and "step-up" come up early, often from a real estate agent or a relative, and the person carrying the estate is left trying to understand a tax idea that affects a real decision about keeping or selling.
This page explains what basis means for inherited property, how California's community property system changes the picture, which date sets the value, and how basis shows up when property is sold. It also separates income-tax basis from California property tax reassessment, which follows the same death but is a different question entirely.
What Cost Basis Means for Inherited Property
Cost basis is the starting value used to figure gain or loss when property is sold. In this setting, "basis" and "cost basis" mean the same thing. For property a person buys, basis usually starts with the purchase price. For property a person inherits, federal law sets a new starting point.
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," with exceptions for an alternate valuation election and certain special valuations. Fair market value is the price a willing buyer and a willing seller would agree on when neither is under pressure and both know the relevant facts. Because inherited property often gained value over the years the decedent owned it, this reset is commonly called a "stepped-up basis" or a "step-up in basis." If the property lost value, the same rule can step the basis down.
The practical meaning is simple. Suppose, as a hypothetical, a parent bought a house long ago and it is worth far more at death. An heir's gain on a later sale is measured from the higher date-of-death value, not from the parent's original price. The growth during the parent's lifetime generally drops out of the heir's calculation. The IRS frequently asked question on sale of inherited property states that if the heir sells "for more than your basis, you have a taxable gain."
A fuller walkthrough of the rule itself appears in the explainer on step-up in basis. Whether any particular estate or sale owes tax depends on facts this page cannot see.
How the Step-Up Works in California — and the Community Property Difference
California is a community property state, and that changes how much of a married couple's property gets a new basis at death. Community property is, broadly, property a married couple acquired during the marriage that the law treats as owned half by each spouse.
Federal law treats the surviving spouse's half of community property as property "acquired from the decedent." 26 U.S.C. § 1014(b)(6) includes "the surviving spouse's one-half share of community property" in the step-up, provided at least one-half of the community interest was includible in the decedent's gross estate. IRS Publication 551, Basis of Assets lists California among the community property states and says that when either spouse dies, "the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property." This is what people mean by the "double step-up": both halves are reset, not just the decedent's.
Other forms of ownership work differently:
- Separate property left to an heir. The heir's inherited interest generally receives a basis equal to its date-of-death value.
- Joint tenancy. Generally only the portion included in the decedent's estate receives a new basis, and the surviving joint tenant keeps the original basis in the rest. IRS Publication 551 works through a joint tenancy example showing this split.
- Tenancy in common. Each co-owner's share is treated on its own, as discussed below.
Joint tenancy between spouses is a frequent source of confusion, because a couple may have held California property as joint tenants while it was also community property. How title was held, and what the couple's records show, decides which rule applies. A CPA, an enrolled agent or a tax attorney reviews the deed and the records to confirm the classification.
What Date Sets the Basis — and When an Alternate Valuation Date Applies
The default date is the date of death. For most inherited property, basis is the fair market value on the day the decedent died, and that figure stays the heir's starting point.
There is one federal alternative. 26 U.S.C. § 1014(a)(2) provides that, "in the case of an election under section 2032," basis is the value "at the applicable valuation date prescribed by such section." The IRS frequently asked question explains that the alternate valuation date applies "only if the executor of the estate files an estate tax return (Form 706) and elects to use the alternate valuation on that return." When that election is made, the heir's basis is the value on the alternate date, not the date of death. The Instructions for Form 706 describe the conditions and the date itself.
Many estates never file a federal estate tax return, and without that return the election is not made, so the date-of-death value governs. Whether an estate must file depends on a threshold the IRS publishes and adjusts; Publication 559 explains how much a person can leave at death before tax is owed.
The person who handles this is the personal representative: the executor named in a will, or an administrator appointed by the probate court when there is no executor. Publication 559 describes the primary duties of a personal representative as collecting the decedent's assets, paying creditors, and distributing what remains to the heirs or other beneficiaries. Gathering date-of-death values is part of that work. Where property passes through a trust, the successor trustee — the person who takes over managing the trust after the person who created it dies — usually gathers those values instead.
How Fair Market Value Is Determined for Inherited Property
For a house or land, the usual tool is an appraisal by a licensed appraiser, often a retrospective appraisal that values the property as of the date of death rather than today. This matters because an appraisal ordered months later still has to answer the question "what was it worth on that day?" Publication 551 notes that an heir who did not receive an estate tax value report can determine basis "using the appraised value at the date of death for state inheritance or transmission tax purposes."
Other assets call for different evidence. Brokerage accounts usually carry date-of-death pricing that a CPA can read and confirm. Interests in a family business, private investments, art, collections and other valuable personal property generally need a qualified appraisal.
The documents gathered at this stage become the record the heir relies on if the IRS later asks how the basis was figured. That record usually includes the appraisal, the estate tax return if one was filed, and any Schedule A to Form 8971. Publication 551 explains that when an estate must file Form 706, beneficiaries "generally will receive a Schedule A (Form 8971) from the executor" reporting the estate tax value of property distributed to them. Under 26 U.S.C. § 1014(f), the heir's basis generally cannot exceed the value finally determined for estate tax purposes, but that limit applies only to property whose inclusion increased the estate tax owed. The IRS FAQ adds that an accuracy-related penalty may apply when someone reports a basis above that final value.
California real property also gets a separate look from the county assessor, for property tax rather than income tax, and the two values may not match. A licensed appraiser provides the valuation; a CPA, enrolled agent or tax attorney reviews whether the documentation supports the basis being reported.
California Property Tax Reassessment at Death — A Separate Question from Income-Tax Basis
One death can set off two unrelated tax events. The step-up is a federal income-tax rule about future gain. Reassessment is a California property tax rule about the annual tax bill. One is handled through the IRS; the other runs through the county assessor, under rules the State Board of Equalization helps administer.
When real property changes ownership, including at death, California generally reassesses it to current market value, which can raise the yearly bill. Someone has to report the change. Under Rev. & Tax. Code section 480(b), the personal representative files a change in ownership statement for real property subject to probate before or at the time the inventory and appraisal is filed with the court clerk. In other transfers at death, including through a trust, the trustee or the person receiving the property files within 150 days after the date of death.
For a transfer on or after February 16, 2021, Rev. & Tax. Code section 63.2 lets a parent-to-child transfer of the parent's principal residence avoid full reassessment if a claim is filed with the assessor and the conditions are met. The home must have been the parent's principal residence. It must become the child's principal residence within one year, and the child must file for the homeowners' or disabled veterans' exemption within a year. A grandparent-to-grandchild transfer qualifies only if all of the grandchild's parents who are the grandparents' children have died by the date of transfer. The exclusion is also capped by a value test tied to the home's taxable value plus a fixed amount. The State Board of Equalization and the county assessor publish the current figure.
The claim generally must be filed within three years after the transfer, or before the property is transferred to a third party, or before an eligible transferee stops living there, whichever is earlier. A claim filed within six months after the mailing of a supplemental or escape assessment notice issued because of the transfer is also treated as timely. A later claim may still be considered if the property has not gone to a third party, but relief then applies only from the lien date of the year the claim is filed. The county assessor's office handles these claims. More on the residence rule and its value test appears in the guide to Proposition 19 and inherited property.
When Inherited Property Is Sold — How Basis Affects the Tax Calculation
Gain on a sale is roughly the amount received minus the heir's basis. Selling costs, such as commissions and certain closing costs, reduce the amount received. Under 26 U.S.C. § 1016(a), basis is also adjusted for items "properly chargeable to capital account," which is why an improvement made after death can raise basis while ordinary repairs generally do not. A CPA or tax attorney identifies which costs qualify.
When inherited property is sold soon after death for close to its date-of-death value, the gap between price and basis is often small or zero. A later sale after prices have risen produces a larger gap. For heirs deciding whether to keep or sell, that is often the moment basis stops being abstract.
The holding period is the length of time property counts as owned, and it affects how gain is taxed. Publication 559 states: "If you sell or dispose of inherited property that is a capital asset, the gain or loss is considered long term, regardless of how long you held the property." This page does not state any federal or California rate. The California Franchise Tax Board publishes how California taxes gains on a state return.
Value can also fall. If inherited property sells for less than its stepped-up basis, the result can be a loss. Publication 559 notes that when an estate sells a decedent's former home to realize its value, the gain or loss is capital gain or loss, "which may be deductible." A tax professional reviews whether a particular loss can be used. The steps of actually listing and selling a house are a separate subject from basis. The page on capital gains on inherited property looks more closely at how gain is reported.
Special Situations: Trusts, Partial Interests, and Property Received as a Gift Before Death
Revocable living trusts. A revocable trust is one the person who created it could change or cancel while alive. Property held in that kind of trust at death is treated as acquired from the decedent: 26 U.S.C. § 1014(b)(2) covers property transferred in trust "with the right reserved to the decedent at all times before his death to revoke the trust." The step-up applies as it would if the property had passed through probate, and the successor trustee usually gathers the date-of-death values.
Irrevocable trusts. These are harder. The result depends on the kind of trust and whether its assets were included in the decedent's estate for estate tax purposes. A CPA or tax attorney reviews the trust document and the records.
Tenancy in common and partial interests. Each co-owner holds a separate, undivided share. Only the decedent's share takes a new basis at death. The surviving co-owner's basis in their own share does not change. The page on inherited property with multiple owners covers what co-heirs face beyond tax.
Gifts made before death. This is the distinction that most often surprises families. The step-up in 26 U.S.C. § 1014 applies to property acquired from a decedent, such as by will, trust or intestate succession (inheritance under California law when there is no will). Property a parent gave away during life is a gift, and gifts follow different federal rules. Generally, the person receiving a gift keeps the giver's original basis, called carryover basis, rather than a date-of-death value. The date the transfer was completed decides which rule applies, which is why a deed signed years before death can lead to a very different tax result than the same house left at death.
One more wrinkle: 26 U.S.C. § 1014(e) provides that if appreciated property was given to the decedent within one year before death and passes back to the person who gave it, or that person's spouse, the step-up does not apply. This page describes these distinctions only and does not discuss planning choices, such as how to create or fund a trust.
