What the rule says
The "step-up in basis" at death is one of the most significant tax benefits in American estate planning. Under federal Internal Revenue Code § 1014, property received from a decedent receives a basis equal to the property's fair market value at the date of the decedent's death (or the alternate valuation date six months later, if elected). This adjusted basis applies for purposes of calculating capital gain when the property is later sold by the heir.
California follows federal income tax basis rules under California Revenue and Taxation Code § 17024.5. As a result, the step-up applies for both federal income tax and California state income tax purposes. There is no California modification that would deny the step-up at the state level.
The step-up applies to most property received from a decedent, including:
- Real property - Stocks, bonds, and investment securities - Mutual funds and exchange-traded funds - Privately held business interests - Tangible personal property - Most other capital assets
Property that does not receive a step-up at death includes: - Retirement accounts (IRAs, 401(k)s, etc.) — these are taxed as ordinary income to the beneficiary as distributions are taken - Income in respect of a decedent (IRD) — accrued income at death that retains its character to the recipient - U.S. savings bonds with deferred interest — the deferred interest is taxable to the beneficiary - Property held in certain irrevocable trusts (depending on trust structure)
Why this matters in California
California's high real estate values and concentrated wealth in long-held investments make the step-up particularly valuable. Common scenarios:
- Long-held California real estate. A parent who purchased a home in 1980 for $150,000 with current value $2.5 million has $2.35 million of unrealized capital gain. If the parent sold during life, that gain would be taxed (federal capital gains plus California's 13.3% top marginal rate, totaling potentially $700,000 in tax on a $2.35M gain). At the parent's death, the heir receives the home with a stepped-up basis of $2.5 million. If the heir sells the home soon after, only post-death appreciation is taxed. - Concentrated stock positions. A retiree holding stock purchased decades ago with substantial unrealized gain similarly avoids the gain through step-up. The heir takes the stock at fair market value at death. - Privately held businesses. Family business interests with significant unrealized appreciation receive the step-up. The heir's basis in the business equals fair market value at death, reducing future tax on sale.
The step-up combined with California's lack of state estate tax (most states do not impose one) means that California decedents below the federal estate tax threshold ($13.99 million per individual in 2026 plus indexed for inflation) can pass substantial wealth to heirs with no estate tax and no capital gains tax on accumulated appreciation.
Community property double-step-up
California's community property regime produces a particularly favorable interaction with the step-up rule. Under federal Internal Revenue Code § 1014(b)(6), both halves of community property receive a step-up at the death of either spouse — even though only one spouse died.
This means: - A married California couple holds $2 million of community property stock with $1 million basis. When one spouse dies, the entire $2 million receives a stepped-up basis. The surviving spouse takes the entire $2 million with a $2 million basis, even though the surviving spouse owned half during life. - Compare to non-community-property states. In a separate-property regime, only the deceased spouse's half (typically the half titled in the deceased spouse's name) receives a step-up. The surviving spouse retains the original basis on their half.
The community property double-step-up is a significant California-specific advantage that produces tens or hundreds of thousands of dollars of tax savings for many California couples.
What this means in practice
The step-up framework drives several California estate planning patterns:
- Hold appreciated assets until death. Selling significantly appreciated assets during life triggers capital gains tax; holding until death eliminates the unrealized gain through step-up. - Avoid lifetime gifts of appreciated assets. A gift during life carries the donor's basis (no step-up); inheritance at death gets the step-up. For appreciated assets, holding for inheritance produces better tax outcomes than gifting. - Use community property characterization strategically. Married couples benefit from confirming community property characterization for jointly held assets to maximize the double-step-up. - Coordinate with Proposition 19 considerations. For real property, Proposition 19 limits the parent-child property tax exclusion. The income-tax step-up still applies, but property tax consequences also factor into the planning.
What you can do about it
For California residents with appreciated assets:
- Hold rather than sell appreciated assets if practical. The step-up at death can eliminate substantial unrealized gain. - For married couples, confirm community property characterization. This maximizes the double-step-up. Documentation of community character — through deeds, brokerage statements, or written agreements — supports the classification. - For separate property, consider whether community-property recharacterization makes sense. Spouses can agree in writing to characterize separate property as community. This is a significant decision with non-tax implications, but for tax purposes it can produce the double-step-up benefit. - Consider basis-conscious gifting strategy. When gifting during life, prefer cash or assets without significant unrealized appreciation; preserve appreciated assets for inheritance. - Consult a California estate tax advisor. Step-up planning interacts with the federal estate tax, California Proposition 19, and other considerations.
For heirs of California decedents:
- Document the date-of-death fair market value. This becomes the new basis. Appraisals are typical for real estate; brokerage statements suffice for publicly traded securities; valuations are needed for private business interests. - Consider whether to elect the alternate valuation date. Six months after death; useful when values have declined post-death. - Coordinate with the executor. Estate tax filings establish values that flow through to basis.
Who this affects most
The step-up in basis is most consequential for:
- California residents with long-held real estate, concentrated stock positions, or privately held businesses with significant unrealized appreciation - Married California couples holding community property — the double-step-up is unique to community property regimes - Heirs of California decedents who plan to sell inherited property — the step-up substantially reduces or eliminates capital gains tax - High-net-worth Californians coordinating estate planning between federal estate tax and income tax considerations
The step-up at death is one of the most significant inheritance benefits in U.S. tax law. For California residents, the combination of step-up and community property characterization can produce particularly favorable outcomes that should be deliberately preserved through estate planning.