The Step-Up in Basis: A Tax Benefit Families Miss When Inheriting a Home
One of the most important tax concepts when inheriting a property is the step-up in basis — it can save you a considerable amount in capital gains. Here’s how it works in plain English.
Watch the video, or read the full guide below.
One of the most important financial concepts when it comes to inheriting a property is something called the step-up in basis — and it can save you a considerable amount of money in taxes.
What the step-up in basis means
When you inherit a property, its value is “stepped up” to the current market value at the time of death. Your cost basis for tax purposes resets to that date-of-death value — not what the original owner paid for it decades ago.
A simple example
Say a house was bought long ago for a small fraction of today’s value, and at the time of death it’s worth $900,000. If you then sell the property for $910,000, you’re generally taxed only on that $10,000 of gain — not on the decades of appreciation. That’s a huge difference.
This is why selling relatively soon after inheriting can mean little to no capital gains tax. Every situation is different, so consult your CPA — but understanding the step-up in basis helps you make the right decision about what to do with the property.
How the date-of-death value gets documented
The step-up is only as good as the paperwork behind it. In a probate, the court-appointed probate referee’s appraisal establishes the date-of-death value. In a trust sale, the trustee typically orders a date-of-death appraisal from a licensed appraiser.
Either way, keep that appraisal with the estate records permanently — if the home is held for a while before selling, that document is what proves your basis to the IRS years later.
What the step-up doesn’t cover
The step-up in basis is a capital gains concept — it doesn’t freeze your property taxes. Under California’s Proposition 19, an inherited home is generally reassessed at market value for property tax purposes unless a child moves in as their primary residence within a year, and even then the relief is limited.
And if the home is kept and appreciates after the date of death, that new appreciation is taxable when it’s eventually sold. The step-up wipes out the past gain, not the future one — which is one more reason the sell-now-or-hold decision deserves real numbers.
Frequently asked questions
What is the step-up in basis? +
It resets the property’s tax cost basis to its fair market value at the date of death, so you’re taxed only on appreciation after that point.
Do I pay capital gains if I sell an inherited home right away? +
Often very little. Because of the step-up in basis, gains are measured from the date-of-death value, so a quick sale typically triggers little to no capital gains. Confirm with your CPA.
Does the step-up in basis apply to a home held in a living trust? +
Generally yes — property in a typical revocable living trust receives a stepped-up basis at the owner’s death, just like property passing through probate. Your CPA can confirm your specific situation.
Does the step-up keep our property taxes low too? +
No — that’s a separate issue. Under Proposition 19, inherited homes are generally reassessed for property taxes unless a child moves in as a primary residence within a year, with limits.
This guide is general education, not legal or tax advice. Every estate is different — for specifics, consult your attorney or CPA, or reach out to Anne directly.
Have questions about your situation?
I help families navigate probate and trust real estate across Ventura County and Los Angeles County.