The Estate Library

Step-Up in Basis in Plain English

The rule that saves heirs the most money is Internal Revenue Code Section 1014. When property is inherited, its cost basis is generally reset to the fair market value on the date of death, which can erase decades of built-up gain for tax purposes. This guide explains the rule without the jargon, shows how it works with a worked example, and flags the ownership situations where the answer is not automatic.

What's inside

Why "sell soon" is often the right instinct

Sell near the date-of-death value and there is typically little or no taxable capital gain, even on a home bought for a fraction of the price decades ago. The full guide walks the rule, the worked example, and the joint tenancy and community property situations that need a second look.

IRC Section 1014 in one clear paragraph

A worked example with the numbers

Joint tenancy: the half-step warning

Community property: its own rules

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The rule, the example, the warnings

The rule that saves heirs the most money is Internal Revenue Code Section 1014. When property is inherited, its cost basis generally jumps to the fair market value on the date of death. Sell near that value, and there is typically little or no taxable capital gain, even if the home was bought for a fraction of that price decades ago.

What the heirs actually inherit is a new starting point for the tax calculation. Gain is measured from the stepped-up basis, not from what the decedent originally paid. That is the entire reason "sell soon" is so often the right instinct for an inherited home: the closer the sale is to the date-of-death value, the smaller the taxable gain, all else being equal.

Illustrative example

A home was purchased decades ago for $300,000 and is worth $900,000 on the date of death. The heir's basis steps up to $900,000. Selling at $900,000 means no gain. Selling later at $950,000 means a gain of $50,000, and that $50,000 is the only figure the tax system looks at for federal capital gain purposes.

Watch the special cases. For property owned in joint tenancy, typically only the deceased owner's share steps up, so the surviving joint tenant's half keeps its original basis. Community property follows its own rules, which often favor the surviving spouse. These situations are routine for a tax professional and surprising for everyone else.

Note what this guide is not: it is not a tax projection for your estate, and it is not legal advice. Federal and California tax treatment depend on the specific ownership, the dates, the values, and the filing history, none of which a general guide can know.

Confirm with a tax professional

Have an estate CPA or enrolled agent run the numbers for your family's specific ownership and dates before you sign anything, list the property, or make a sale-versus-keep decision. The step-up is a powerful rule; the specifics are where the mistakes happen.

This guide is general information about California estates and federal tax law, not legal or tax advice. Confirm your family's situation with a qualified California probate attorney and your tax professional.

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