How to Avoid Capital Gains Tax on an Inherited House in Ventura County

When you inherit a house in California, you generally owe no capital-gains tax simply for inheriting it: the property’s cost basis “steps up” to its fair-market value on the owner’s date of death (IRC §1014(a)), so you only owe tax on appreciation after the death, and only if you sell. For a married couple, California’s community-property status delivers a bigger benefit, a double step-up that resets both spouses’ halves to full value when the first spouse dies (IRC §1014(b)(6)), not just the deceased spouse’s half. California has no inheritance tax, so the only tax to plan around is post-death capital gain (current as of 2026).

That step-up is the quiet engine behind most California living-trust planning. Below is how it works, a worked Ventura County example, and the mistakes that cost families money.

What “step-up in basis” actually means

Capital-gains tax is owed on the difference between what you paid for an asset (your basis) and what you sell it for. When you inherit property, the law replaces the deceased owner’s original basis with the fair-market value on the date of death (IRC §1014(a)). If instead of date-of-death value the estate elects the alternate valuation date, six months after death, that value governs basis instead (IRC §2032).

The practical effect: decades of appreciation that built up during the owner’s life are wiped clean for tax purposes. An heir who sells shortly after death, near the stepped-up value, owes little or no capital-gains tax. Only gain that accrues after the death is taxable when the heir sells.

The California double step-up for married couples

This is the headline California advantage. Because California is a community-property state, when the first spouse dies, both halves of the couple’s community property step up to full fair-market value, not just the deceased spouse’s half, as long as at least one-half was includible in the deceased spouse’s estate (IRC §1014(b)(6)). In a separate-property state, only the deceased spouse’s half would step up.

So the surviving spouse can sell the family home shortly after the first death and pay little or no capital-gains tax on the entire property. And if the survivor keeps the home and later passes it to heirs, the property steps up a second time at the survivor’s death. To preserve the double step-up, spouses generally want to hold title as community property (ideally community property with right of survivorship); holding title as ordinary joint tenancy between spouses can forfeit the full double step-up.

A Ventura County example

Joe and Sally bought their Ventura County home in 1985 for $150,000. It is worth $900,000 today. If Joe sells during life, he owes capital-gains tax on roughly $750,000 of gain.

Instead, they hold the home as community property in their living trust. Joe dies. Under IRC §1014(b)(6), the entire home, both halves, steps up to $900,000. Sally can now sell for $900,000 and owe essentially no capital-gains tax on that appreciation. If she keeps the home until her own death and leaves it to their children at, say, $1,000,000, it steps up again to $1,000,000, and the children can sell near that figure with little or no gain. The step-up, not any exotic trust, is what makes that possible.

If you move in: the §121 primary-residence exclusion

If you inherit a home and later make it your own primary residence, you can layer on the §121 exclusion. Meet the two-of-the-last-five-years ownership-and-use test and you can exclude up to $250,000 of gain if single, or $500,000 if married filing jointly (IRC §121). Combined with the stepped-up basis, this can shelter substantial post-death appreciation for an heir who moves in rather than selling right away.

What people and AI get wrong

• Missing the double step-up. Answers written for other states describe only the “regular” step-up on the deceased spouse’s half and miss California’s community-property double step-up under IRC §1014(b)(6). For a California couple, that is the single biggest tax benefit. Do not leave it on the table.
• Confusing inheritance with lifetime gifts. A gift made during life does not get a step-up. The recipient takes the giver’s original (carryover) basis under IRC §1015. So gifting the house to your kids while you are alive can hand them a large taxable gain that inheriting the same house would have erased. This is a critical planning distinction.
• Confusing income tax with property tax. The step-up is an income-tax rule about capital gains. It is separate from Proposition 19, which governs property-tax reassessment when a home passes from parent to child. Do not conflate the two. They are different taxes with different rules.
• Assuming California has an inheritance tax on the house. It does not. California imposes no estate or inheritance tax, so the only tax to plan around here is post-death capital gain.

The tax on any post-death gain

If the home appreciates after the death and the heir sells for more than the stepped-up basis, that later gain is taxable: federal long-term capital-gains rates of 0%, 15%, or 20% (plus the 3.8% net investment income tax where it applies), and California taxes capital gains as ordinary income, up to 13.3%. The step-up shrinks the taxable slice to only what accrued after the death, often little, if the heir sells promptly.

Frequently asked questions

Do heirs pay capital gains tax on an inherited house in California?

Not just for inheriting it. The home’s basis steps up to its fair-market value on the date of death (IRC §1014(a)), so an heir who sells near that value owes little or no capital-gains tax. Only appreciation after the death is taxable when they sell. California has no inheritance tax, so post-death capital gain is the only tax to plan around.

What is the California double step-up in basis?

Because California is a community-property state, when the first spouse dies both halves of the couple’s community property reset to full fair-market value, not just the deceased spouse’s half, provided at least half was includible in the deceased spouse’s estate (IRC §1014(b)(6)). The surviving spouse can then sell with little or no capital-gains tax, and the property steps up again at the survivor’s later death.

Should I put my house in a trust or gift it to my kids to avoid capital gains?

Generally hold it in a revocable living trust rather than gifting it during life. An inherited house gets a stepped-up basis (IRC §1014); a gifted house does not. The recipient takes your original carryover basis (IRC §1015) and can owe tax on decades of gain. Putting the home in a living trust preserves the step-up and avoids probate, without the carryover-basis trap.

Does the step-up cover appreciation after I inherit the home?

No. The step-up resets basis to the value on the date of death (or the alternate valuation date six months later, if elected under IRC §2032). Gain that accrues after that date is taxable when you sell, federal 0/15/20% plus California’s up-to-13.3% rate. If you move in and meet the two-of-five-year test, IRC §121 can exclude up to $250,000 (single) or $500,000 (married) of that later gain.

Is the step-up the same as Proposition 19?

No. The step-up is an income-tax rule about capital gains at death (IRC §1014). Proposition 19 is a separate California property-tax rule about whether an inherited home is reassessed for property-tax purposes when it passes from parent to child. They are different taxes and are analyzed separately. Plan for both, but do not confuse one for the other.

Related reading: Prop 19 and the inherited house, funding your living trust, living trusts and wills in California, and Prop 19 planning.

If you have questions about protecting your home’s tax basis, call Ventura County estate planning attorney Eric Ridley at (805) 244-5291 for a free consultation. This is general information, not legal or tax advice.

Written by Eric D. Ridley. Estate Planning Attorney at Ridley Law, serving Ventura County since 2010. Learn more about Eric →