Step-Up in Basis: Definition and How It Works in California

By Eric Ridley, attorney, Ridley Law. Updated September 2026.

A step-up in basis resets an inherited asset’s tax basis to its fair market value on the date the previous owner died, which usually erases the capital gains that built up during that owner’s lifetime.

How it works in California

Federal law controls this rule, not California law. Under 26 U.S.C. § 1014, the basis of property acquired from a decedent becomes its fair market value at death rather than what the decedent originally paid for it. That new basis is what an heir later uses to figure capital gains on inherited property if they sell.

Because California is a community property state, a married couple’s community property gets a bigger benefit than most other ownership forms. Under 26 U.S.C. § 1014(b)(6), both halves of an asset held as community property typically get the step-up at the first spouse’s death, not just the half that belonged to the spouse who died. Property the decedent owned outright gets a full step-up. Property held in joint tenancy, including a spouse’s joint tenancy that wasn’t held as community property, usually steps up only on the decedent’s share.

Assets a settlor placed in certain irrevocable trusts raise a harder question. Whether those assets still get a basis step-up at death depends on how much control the settlor kept and whether the asset counted as part of the settlor’s taxable estate.

Why it matters

For example, a family that inherits a rental property the parents bought decades earlier can sell it soon after death without paying tax on the years of appreciation, because the taxable gain is measured from the stepped-up value, not the original purchase price. Wait years to sell and the math changes, since gains after the date of death are still taxable.

Common mistakes

People assume a step-up applies to retirement accounts. It doesn’t; IRAs and 401(k)s follow their own income tax rules. People also assume any trust avoids or automatically gets the step-up, when the answer depends on the trust’s terms, and they sometimes treat joint tenancy with a non-spouse the same as community property, which overstates the basis.

Related terms

• Community Property: the ownership form that gives spouses a full basis step-up on both halves at the first death.
• Irrevocable Trust: whether trust assets get a step-up depends on how the trust is drafted and funded.
• Proposition 19: a separate rule about property tax reassessment, not income tax basis.
• QTIP Trust: assets held in this marital trust typically get a second step-up at the surviving spouse’s death.
• Separate Property: usually steps up only on the half the decedent owned, unlike community property.
• Community Property with Right of Survivorship: spousal title that passes the whole property to the survivor while keeping community property treatment.

Part of the California estate planning glossary. For the full treatment, see Capital Gains Tax on Inherited Property in California.