Step-Up in Basis California Guide

What Is the Step-Up in Basis?

The step-up in basis is one of the most valuable tax benefits in the U.S. tax code. When you inherit an asset, your cost basis is "stepped up" to the fair market value on the date of the decedent's death. This means all appreciation during the decedent's lifetime is permanently excluded from capital gains tax — it is never taxed. For a California family with a home that has appreciated significantly over decades, the step-up in basis can eliminate hundreds of thousands of dollars in capital gains tax.

How the Step-Up Works

Example: Your parent purchased Apple stock in 1990 for $10,000. At their death in 2026, the stock is worth $500,000. Without the step-up, you would owe capital gains tax on $490,000 of gain when you sell. With the step-up, your basis is $500,000 — you can sell immediately with zero capital gains tax. The $490,000 of gain that accrued during your parent's lifetime is permanently excluded from tax.

Double Step-Up for Community Property

California's community property rules provide a "double step-up" — both halves of community property receive a step-up in basis when the first spouse dies. This is a significant advantage over joint tenancy, where only the deceased spouse's half is stepped up. Example: A couple purchased stock for $100,000. At the first spouse's death, the stock is worth $1 million. Under community property, both halves are stepped up to $500,000 each — total basis of $1 million, zero capital gains tax on sale. Under joint tenancy, only the deceased spouse's $500,000 half is stepped up — the surviving spouse's $50,000 basis on their half remains, resulting in $450,000 of taxable gain.

Planning to Maximize the Step-Up

KDA's strategies to maximize the step-up in basis: (1) Hold appreciated assets until death — do not sell highly appreciated assets during your lifetime if you can afford to hold them; the step-up at death eliminates the capital gains tax. (2) Title assets as community property — not joint tenancy — to get the double step-up. (3) Use the grantor trust swap power — swap low-basis assets from an irrevocable trust back into the estate to get a step-up at death. (4) Avoid gifting highly appreciated assets — gifts carry over the donor's basis; inherited assets get a step-up. (5) Use a CRT for highly appreciated assets — the CRT sells without immediate capital gains tax, and the remainder passes to charity.

Carryover Basis: When There Is No Step-Up

Not all inherited assets get a step-up in basis. Assets in a traditional IRA or 401(k) do not get a step-up — distributions are taxed as ordinary income regardless of when the assets were acquired. Assets in an irrevocable trust that is not included in the decedent's estate do not get a step-up. Gifts made during the decedent's lifetime carry over the donor's basis — they do not get a step-up. KDA identifies assets that will and will not receive a step-up in basis as part of estate planning.

California Step-Up Rules

California follows federal rules for the step-up in basis. California does not have a separate state capital gains tax on inherited assets — the step-up eliminates both federal and California capital gains tax on appreciation during the decedent's lifetime. California's community property rules provide the double step-up on both halves of community property, which is one of the most valuable tax benefits available to California married couples.