How Does Step-Up in Basis Work on an Inherited House in California?
Your dad bought his house in San Juan Capistrano in 1979 for $62,000. It's worth close to $1.4 million now.
You're the successor trustee. And somewhere in the middle of sorting through his files, you found the old purchase paperwork and had one thought: are we about to owe the IRS a fortune on this?
Probably not. And the reason is a rule called step-up in basis.
This is a real estate planning conversation, not tax or legal advice. Your CPA and estate attorney should confirm how this applies to your family's specific trust. But here's the plain version of how it works.
What "Basis" Even Means
Basis is just the number the IRS uses to figure out your profit when you sell something. If your dad bought the house for $62,000 and sold it while he was alive for $1.4 million, his taxable gain would be roughly $1.34 million. Minus a $250,000 exclusion if he qualified, that's still a massive tax bill.
But he didn't sell it. He passed it down.
The Step-Up, Explained Simply
When someone dies and their property passes to their heirs, the basis doesn't stay at $62,000. It resets — steps up — to the fair market value on the date of death.
So if the house was worth $1.4 million the day your dad passed, that becomes the new basis. If you sell it for $1.4 million a few months later, your taxable gain is close to zero. Not $1.34 million. Zero.
This is one of the most valuable, least understood parts of an inheritance. Families who don't know it exists sometimes rush to sell out of fear of a tax bill that was never coming.
Why Timing Still Matters
The step-up locks in the value as of the date of death. It doesn't move with the market after that.
Say the house was worth $1.4 million when your dad passed, but you wait two years to sell and it's now worth $1.55 million. That $150,000 of appreciation happened after the step-up, so it's taxable gain. Sell quickly after an appraisal and there's usually little to no gain to report.
That's why getting a professional appraisal soon after death matters so much. Without one, you're guessing at your basis instead of proving it with documentation.
Where This Gets Complicated
A few situations change the math:
If the house was held in a trust that was irrevocable and not fully includable in your dad's estate, the step-up rules can work differently. If your parents owned the house together and one passed years before the other, only half the property may have stepped up at the first death, depending on how title was held. And if the trust was funded before or after certain dates, the language in the trust document itself can affect the outcome.
None of this is something to figure out on your own. It's exactly the kind of gap where families lose money — not because anyone did anything wrong, but because nobody connected the real estate decision to the tax conversation early enough.
What I'd Do First
Order a professional appraisal dated as close to the date of death as possible, even if you're not ready to sell. That number protects you either way.
Then bring your CPA into the conversation before you list anything. A five-minute call can save six figures.
If you're not sure where to start, request our Trustee Home Sale Checklist. It lays out the order of operations — appraisal, CPA conversation, property decision — so you're not piecing it together while also grieving.
Kristina & Eric Hudes
The Hudes Group at Keller Williams
OC Real Estate Planners
949-351-3924 | HudesGroup.com/LongtimeHomeowners
