How Does Stepped-Up Basis Work on an Inherited Home?

By Bart Hubbard, Realtor, DRE #01815497 | Published August 27, 2026 | Updated October 1, 2026

When you inherit a home, its tax basis generally “steps up” to its fair market value on the date of death. Under federal law, only the gain above that value is taxable when you sell. If a parent bought a house decades ago and it is worth far more today, most or all of that lifetime gain usually disappears for tax purposes.

Basis is the number the IRS subtracts from your sale proceeds to find your gain. Normally it is what the owner paid plus improvements. For inherited property, Internal Revenue Code section 1014(a) replaces that history with the value at death.

The one thing most people get wrong is failing to document that value. Without a solid date-of-death valuation, heirs may have a hard time supporting their basis if the IRS asks.

Key Facts

• Inherited property generally takes a basis equal to its fair market value on the date of death, or an alternate valuation date if elected under IRC 2032 (IRC 1014(a)).
• A sale of inherited property is reported as long-term regardless of how long the heir held it, with “INHERITED” entered as the acquisition date on Form 8949.
• California has no lower capital gains rate; the Franchise Tax Board taxes all capital gains as ordinary income.
• California has no estate tax for deaths on or after January 1, 2005, and collects inheritance tax only for deaths before June 8, 1982.
• The federal basic exclusion amount for people who die in 2026 is $15,000,000.
• In a California probate, a probate referee appraises real estate for the estate inventory, charging 0.1% of the value appraised.
• The inventory and appraisal is due within four months after letters are first issued (Prob. Code 8800).

What Does “Stepped-Up Basis” Actually Mean?

It means the heir’s starting value for tax purposes is reset to what the home was worth when the owner died. The IRS explains this rule on its gifts and inheritances FAQ.

Your taxable gain is the sale price, minus selling costs, minus that stepped-up basis. If the home sells for about its date-of-death value, the taxable gain may be close to zero.

How Is the Date-of-Death Value Determined?

It comes from an appraisal or other credible evidence of what the home would have sold for on that date. Common sources include:

• The probate referee’s value on the estate inventory, in a court probate.
• A retrospective appraisal by a licensed appraiser, often used for trust homes that skip probate.
• Comparable sales from around the date of death, prepared by a real estate professional.

Keep a copy of whatever you rely on with your tax records.

Is the Probate Referee’s Value Your Tax Basis?

It is often the starting point, but the tax standard is fair market value, not a court form. A probate referee is an appraiser appointed by the State Controller to value estate assets such as real estate.

Many heirs and CPAs use the referee’s value because it is independent and dated. If it seems far off, talk with your CPA before relying on it. For how referees work locally, see How Is a House Appraised in Probate in Sacramento County?.

What Is the Alternate Valuation Date?

It is an optional later valuation date that an estate can elect under IRC 2032 instead of the date of death. The election ties to the federal estate tax process.

With a 2026 basic exclusion of $15,000,000, according to the IRS 2026 inflation adjustments, most estates will not file a federal estate tax return. For most families, the date of death controls.

Do Both Halves Step Up When a Spouse Dies?

Often, yes, for California community property. The deceased spouse’s half steps up as inherited property. Under IRC 1014(b)(6), the surviving spouse’s half of community property also gets a new basis, as long as at least half of the whole community interest was included in the deceased spouse’s gross estate.

How title was held matters. A home held as community property may be treated differently from one held in joint tenancy. A CPA or estate attorney can review the deed and the facts.

Does a Home in a Living Trust Get a Stepped-Up Basis?

Generally, yes, when the owner kept the right to revoke or change the trust until death. IRC 1014(b)(2) and (b)(3) extend the stepped-up basis to property the owner put in that kind of trust. A trust avoids probate, but it does not usually lose the step-up.

The difference is documentation. A trust home has no probate referee, so a successor trustee, the person who takes over managing the trust, often orders a retrospective appraisal. Read Can You Sell a House Held in a Trust Without Going to Court?.

What Happens If a Parent Gave the House Away Before Death?

A home given during life generally keeps the giver’s original basis instead of stepping up. That can turn a small taxable gain into a very large one.

Families sometimes add a child to title or deed the house early to “avoid probate.” Before anyone signs a deed, a CPA or estate attorney should compare the probate savings with the lost step-up. See Do You Have to Go Through Probate to Sell an Inherited House in California?.

How Long Do You Have to Own It for Long-Term Treatment?

No minimum. The IRS Form 8949 instructions say to report inherited property as a long-term gain or loss regardless of how long you held it.

Federal treatment is only half the picture. According to the Franchise Tax Board, California taxes all capital gains as ordinary income.

What Can Change Your Basis After You Inherit?

Capital improvements made after the date of death generally add to basis. Examples include a new roof or a replaced sewer line. Routine repairs and cleaning usually do not.

Selling costs, such as commission and escrow fees, reduce the amount you realize. If you rent the house before selling, depreciation lowers basis and can create taxable recapture. For the broader tax picture, read Do You Pay Capital Gains Tax When You Sell an Inherited House?.

What Does This Look Like With Real Numbers?

Illustrative example, not a real client.

A parent bought a Sacramento home for $95,000. At the parent’s death, the probate referee values it at $600,000. The heirs sell it eight months later for $640,000.

1. Sale price: $640,000
2. Selling costs (assume 6%): 6% x $640,000 = $38,400
3. Amount realized: $640,000 – $38,400 = $601,600
4. Stepped-up basis: $600,000
5. Taxable gain: $601,600 – $600,000 = $1,600, reported as long-term

Change one fact: the parent deeded the house to the heirs years before death, so the heirs keep the parent’s $95,000 basis.

1. Amount realized: $601,600
2. Carryover basis: $95,000
3. Taxable gain: $601,600 – $95,000 = $506,600

The only difference is how the house changed hands. The gain grows by $506,600 – $1,600 = $505,000.

What Mistakes Should You Avoid?

• Using the parent’s purchase price as your basis. You may report a gain that the law does not tax.
• Skipping a date-of-death valuation. Heirs may struggle to support their basis if the IRS asks.
• Deeding the house to children to avoid probate. The children may lose the step-up and inherit a large taxable gain.
• Assuming California taxes gains at a lower rate. California taxes capital gains as ordinary income.
• Treating repairs as improvements. Routine repairs usually do not increase basis.

Summary

• Inherited property generally takes a basis equal to fair market value on the date of death, under IRC 1014(a).
• An estate can elect an alternate valuation date under IRC 2032, but most estates are below the $15,000,000 federal exclusion for 2026 deaths.
• The probate referee’s appraisal is a common starting point for basis in a California probate.
• Trust homes usually get a retrospective appraisal instead.
• Community property may step up on both halves at the first spouse’s death; confirm with a CPA.
• A home given during life generally keeps the giver’s basis.
• Inherited property is reported as long-term regardless of holding time.
• California taxes capital gains as ordinary income and has no estate or inheritance tax for current deaths.

Run your numbers: Use the Stepped-Up Basis Calculator to enter the date-of-death value, sale price and selling costs and see an estimate of the taxable gain to discuss with your CPA.

Next Steps

Talk with Bart: Book a free 15-minute call. I’ll listen to where you are in the process, look at the property, and tell you your options, including the ones that don’t involve hiring me.

Download the Sacramento-Area Probate Home Sale Guide: A free PDF that walks through each step, including the valuation records to gather for your CPA.

This article is general information, not legal or tax advice. Probate and tax rules depend on your facts. Talk with a California probate attorney or CPA before acting. Figures current as of October 1, 2026.

About the Author

Bart Hubbard is a Realtor with HomeSmart ICARE Realty (DRE #01815497) and a C.A.R. Certified Probate and Trust Specialist who helps families across the greater Sacramento area sell inherited, probate and trust homes. He works alongside probate attorneys, fiduciaries and local vendors to handle pricing, cleanouts, repairs and court-confirmation sales, so executors can focus on their families. More about Bart is on his bio page.

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