Estate planning guide
The Step-Up in Basis for Spouses
How a federal tax rule can erase decades of capital gain, and why California community property matters.
Why it matters
A tax rule worth knowing before you sell
When a spouse dies, the survivor often owns a home or investments bought decades earlier for far less than they are worth today. If the survivor sells, the question is how much of that growth is taxed as capital gain. For many California couples, the answer is very little, because of a federal tax rule called the step-up in basis.
How much of the benefit applies depends on how the property was owned. This guide explains the rule, why community property matters, and what to do after a death.
The rule matters most in places like Orange County and the Inland Empire, where homes bought decades ago have often grown many times in value. A sale after a death can be close to tax-free or can carry a large capital gains bill, and the difference often comes down to how the property was titled years earlier.
What basis means
Basis is the starting point for measuring capital gain. It is usually what you paid for the property, plus the cost of improvements. When you sell, the taxable gain is generally the sale price minus your basis. The lower the basis, the larger the gain.
The step-up at death
When someone dies, property included in that person’s estate generally receives a new basis equal to its fair market value on the date of death. The growth that happened during the person’s lifetime is generally never taxed as capital gain. If the property has lost value instead, the basis adjusts down.
Why community property matters
California is a community property state. For property that is community property, federal tax law generally gives both halves a new basis when the first spouse dies, not just the deceased spouse’s half. This is often called a double step-up. In a state without community property, a couple’s jointly owned home would generally get a new basis only on the half owned by the spouse who died.
An example
A couple bought a home in Riverside County for $200,000. When one spouse dies, it is worth $900,000. If the home is community property, the survivor’s basis generally becomes $900,000, and a sale soon after at that price would produce little or no taxable gain. If only half the home got a new basis, the survivor’s basis would be $550,000, leaving about $350,000 of gain. The exclusion for selling a main home can reduce the tax in either case.
How title affects the result
How the property is held matters:
Community property, including community property held in a revocable living trust, generally qualifies for the full step-up.
Property held in joint tenancy between spouses is often treated as two separate halves, which can limit the step-up to the deceased spouse’s half unless the survivor can show it was really community property.
Separate property, such as an inheritance one spouse received, gets a new basis only if it belonged to the spouse who died.
Our guide to joint tenancy and your trust explains why many couples move away from joint tenancy title.
What does not get a step-up
Retirement accounts such as IRAs and 401(k) plans generally do not receive a step-up; withdrawals are taxed as income. Some annuities are treated the same way. Property given away during life generally keeps the giver’s original basis rather than getting a new one. And assets held in a bypass trust after the first death generally do not get another step-up when the survivor dies, a point covered in our guide to marital trusts.
Steps after a spouse dies
A few records make the step-up easy to use later:
Get a written appraisal of the home and any other real estate as of the date of death.
Ask brokerage firms for date-of-death values on investment accounts.
Keep these records with the trust documents, because they will be needed when property is sold.
Talk with a tax professional before selling.
Property tax is a separate question
The step-up is a federal income tax rule. It does not affect California property tax. A transfer to a surviving spouse is generally not reassessed for property tax purposes, but that result comes from a different set of rules.
Talk with us
Montanez Yu prepares complete estate plans for individuals and families throughout California, including revocable living trusts, wills, powers of attorney, and advance health care directives. Estate planning consultations are free, and every plan is a flat fee, quoted in writing before we begin. Call (951) 444-7407 or request a free consultation.
This guide is general information about California law, not legal advice for your situation. Reading it does not create an attorney-client relationship.