A client inherited her parents’ Ventura County home, worth about $800,000. She was told she might owe roughly $180,000 in capital gains tax. She panicked. Her siblings panicked. Everyone thought a big piece of their parents’ legacy was about to disappear.

Then we walked through the step-up in basis, a federal tax rule most people barely understand, and her taxable gain on the sale came out to zero. Here’s how the step-up in basis works, the three steps we used, the documents you’ll need, and how it fits with California’s Prop 19.

I’m Tricia Garcia. For ten years I’ve helped people sell inherited and long-time homes in Ventura and Los Angeles County, with a lot of my focus in Leisure Village and Camarillo. I’m a real estate professional, not a CPA or attorney, so this is education, not tax or legal advice. Part of my job is coordinating the CPA, attorney, and appraiser so you aren’t doing it alone.

The Math Everyone Gets Wrong

Say your parents bought their home in the 1980s for $200,000, and today it’s worth $800,000. Most people assume the $600,000 increase is taxable. At a combined rate of around 30%, that’s about $180,000. That fear is why people panic, why siblings fight, and why homes get sold in a rush.

For inherited property, that calculation is usually wrong. If you sell without understanding the step-up in basis, you could end up worrying about, or even paying, tax you don’t owe.

What Is a Step-Up in Basis?

According to IRS Publication 551, the basis of inherited property is generally its fair market value on the date the owner died. That’s the step-up in basis. Your parents’ original $200,000 cost disappears from the math, and your basis becomes the $800,000 date-of-death value.

So if you sell for $800,000, the math is $800,000 minus an $800,000 basis, which equals zero taxable gain. That’s how my client ended up owing no capital gains tax on the sale.

Without the step-up in basis, the gain would be about $600,000. With it, the gain is about zero. The step-up in basis applies to inherited homes of any size, from condos to single-family homes, whether the property is worth $400,000 or $4 million.

The 3-Step Strategy

• ✓Several certified copies of the death certificate
• ✓The professional date-of-death appraisal
• ✓The trust and any amendments, or letters from the probate court
• ✓Records of any improvements made after the date of death

Step-Up in Basis vs. Prop 19

This is the biggest source of confusion I see. The step-up in basis is about federal income tax when you sell. Prop 19 is about California property tax while you own the home. They’re two separate systems, run by different governments.

Under Prop 19, if you inherit a parent’s home and don’t move in as your primary residence, the county generally reassesses it to today’s market value. You might avoid a big capital gains bill, but property taxes could jump from a few thousand dollars a year to roughly 1% of the new value, around $8,000 or more on an $800,000 home. For the details, read Inherited a Home in California? How Proposition 19 Could Change Your Property Taxes.

One more California deadline: a change in ownership statement generally must be filed with the county assessor within 150 days of the death, or with the inventory and appraisal if the estate is in probate. The State Board of Equalization explains the form and the penalty for filing late.

Trust or Probate: Does It Change the Step-Up in Basis?

No. The step-up in basis applies the same way either way. What changes is the timeline. With a trust, the home can often be sold within a month or two once the paperwork is gathered. With probate, it can take many months, and in my experience often 9 to 18 months in Ventura and Los Angeles County, because you can’t sell without the court’s permission. The basis is still set at the date of death. If you’re the trustee, start with Named Successor Trustee After a Death? What to Do First.

Here’s the catch. If the home rises in value after the date of death, that new gain can be taxable. Inherit at $800,000, sell two years later for $900,000, and the extra $100,000 may be taxed. Not a disaster, but better to know early.

Should You Sell or Keep the Home?

Selling often makes sense if you don’t need the property, the market is strong, you want to avoid a Prop 19 property tax jump, or you need to divide the proceeds among heirs. Keeping it may make sense if you want to live there, if rent would comfortably cover the costs, or if the home has deep personal meaning.

A bonus for the right situation: if you move in and it becomes your main home, IRS rules on selling your home may let you exclude up to $250,000 of gain ($500,000 if married filing jointly) after you’ve owned and lived there at least two of the five years before the sale. Combined with the step-up in basis, that can be powerful. Ask your CPA whether it fits you. For more on the tax side, see Inherited a House in California? Here’s the Tax Bill You Need to Know.

Frequently Asked Questions

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