California Double Step-Up in Basis: Tax Savings Explained
California double step-up in basis. Learn how community property provides capital gains tax benefits and saves heirs thousands.
California's community property status provides one of the most valuable tax advantages in estate planning: the double step-up in basis. When one spouse dies, both halves of community property receive a stepped-up basis, potentially eliminating hundreds of thousands of dollars in capital gains taxes.
What Is Step-Up in Basis?
When you sell property, you pay capital gains tax on the profit. Your "basis" is what you paid for the property. The gain is the difference between sales price and basis.
Example without step-up:
- Bought stock for $50,000
- Sold for $300,000
- Capital gain: $250,000
- Tax at 20%: $50,000
When you inherit property, the basis "steps up" to fair market value at death. All that appreciation during the decedent's lifetime is never taxed.
Example with step-up:
- Decedent bought stock for $50,000
- Worth $300,000 at death
- Heir's stepped-up basis: $300,000
- Heir sells for $300,000
- Capital gain: $0
- Tax: $0
The California Advantage
In most states, when one spouse dies, only the deceased spouse's share of jointly owned property gets a step-up. The surviving spouse's share keeps its original basis.
California is different. Because it is a community property state, both halves of community property receive a stepped-up basis when either spouse dies.
This is the "double step-up."
How Much Does It Save?
Typical Scenario
John and Mary bought their California home in 1990 for $200,000. It is now worth $1,400,000. John dies in 2025.
In a Separate Property State:
- Mary's half: Original basis $100,000
- John's half: Steps up to $700,000
- Mary's total basis: $800,000
- If Mary sells for $1,400,000: $600,000 gain
- Federal tax (20%): $120,000
- California tax (13.3%): $79,800
- Total tax: $199,800
In California (Community Property):
- Mary's half: Steps up to $700,000
- John's half: Steps up to $700,000
- Mary's total basis: $1,400,000
- If Mary sells for $1,400,000: $0 gain
- Total tax: $0
Savings: $199,800
What Property Qualifies
Community Property
Property acquired during marriage with community funds:
- Primary residence
- Investment properties bought during marriage
- Stocks purchased during marriage
- Retirement benefits earned during marriage
- Business interests developed during marriage
Quasi-Community Property
Property that would have been community property if acquired in California, but was acquired while living in another state. If you moved to California from Texas, assets acquired during your Texas marriage get the double step-up.
What Does NOT Qualify
Separate property (owned before marriage or received as gift/inheritance) receives only a single step-up on the deceased spouse's share.
Joint tenancy (not community property) receives only a single step-up. This is why proper titling matters.
Joint Tenancy vs. Community Property
Many California couples hold property as "joint tenants" because that is what was on the deed form. This costs them the double step-up.
| Feature | Joint Tenancy | Community Property |
|---|---|---|
| Avoids probate | Yes | Depends on planning |
| Step-up at first death | Half only | Both halves |
| Tax benefit | Partial | Maximum |
Converting to Community Property
You can change ownership from joint tenancy to community property (or community property with right of survivorship) by recording a new deed. This preserves the double step-up benefit.
Do this before the first death. After death, it is too late.
Documentation Requirements
To claim the double step-up, maintain records showing:
Community Property Character
- Marriage certificate
- Date of acquisition
- Source of funds
- Property deed showing ownership
Fair Market Value at Death
- Real estate appraisal
- Brokerage statements
- Probate inventory values
Keep these records indefinitely. You may need them years later when selling.
Planning Considerations
Review Property Titles
Check how your property is titled. If it says "joint tenants" instead of "community property," consider changing it.
Document Everything
Keep records of when property was acquired and with what funds. This establishes community property character.
Do Not Sell Appreciated Property Before Death
If property has appreciated significantly, the step-up at death eliminates the gain. Selling before death triggers tax.
Sell Depreciated Property Before Death
If property has lost value, selling before death realizes the loss for tax purposes. At death, the loss disappears.
Interaction with Proposition 19
The income tax step-up is separate from property taxes. Proposition 19 may cause property tax increases on inherited property even though the income tax basis steps up.
For income taxes: The step-up remains valuable. For property taxes: Reassessment may occur depending on Prop 19 rules.
Step-Down Warning
The step-up works both ways. If property has declined in value, the basis steps down to the lower value.
Example:
- Stock bought for $100,000
- Worth $40,000 at death
- Heir's basis: $40,000
The $60,000 loss is gone forever. If the decedent had sold before death, the loss could have been used for tax purposes.
Frequently Asked Questions
What is the double step-up in basis?
In California, both halves of community property receive a stepped-up basis when either spouse dies. This means 100% of the property's basis resets to fair market value, potentially eliminating all capital gains taxes.
Does California have a double step-up?
Yes. California is a community property state, and under IRC Section 1014(b)(6), both halves of community property receive a stepped-up basis at the first spouse's death.
Does joint tenancy get the double step-up?
No. Joint tenancy property receives only a single step-up on the deceased owner's share. To get the double step-up, property must be held as community property.
How do I document the step-up?
Keep records showing: (1) the property was community property, (2) the date of death, and (3) fair market value at death. An appraisal or probate inventory provides value documentation.
Does the step-up apply to retirement accounts?
No. IRAs and 401(k)s do not receive a step-up because they contain pre-tax dollars. Distributions are taxed as ordinary income.
Related Guides
- California Step-Up in Basis Guide
- California Community Property Probate
- Proposition 19 and Inherited Property
Sources:
- Internal Revenue Code Section 1014 (Basis of Property Acquired from Decedent)
- Internal Revenue Code Section 1014(b)(6) (Community Property)
- IRS Publication 551
This guide provides general information about the step-up in basis. Tax rules are complex. Consult with a tax professional for advice specific to your situation.