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What is the step up in basis when a spouse dies in California?
When a spouse dies, federal law resets the tax basis of what they owned to its market value on the date of death, so growth during their life is never taxed as a capital gain. In California, community property gets that reset on both halves, not just the half that passed. That double step up can erase the gain on a house bought decades ago. How the property is titled decides whether you get it.
A death resets the number your tax is measured from.
When you sell something, the tax is on the gain. That is the sale price minus your basis, which is roughly what you paid plus improvements. Under current federal law, when someone dies, the basis of what they owned resets to its market value on the date of death. That is the step up. The growth that happened during their life is never taxed as a capital gain.
Quick note on who is talking. opfinances.com is a licensed insurance agency. We are not a financial advisor, not a fiduciary, and not a tax adviser. This is general education, not advice about your situation.
In California, a surviving spouse can get a new basis on both halves.
In most states, when a married couple owns something together and one of them dies, only the half that belonged to the person who died gets the new basis. The survivor's half keeps the old one.
California is a community property state, and federal law treats community property differently. If an asset is community property, both halves get stepped up when the first spouse dies. People call it the double step up. On a house bought decades ago, it can wipe out the whole gain.
A 1.7 million gain can drop to zero.
Illustrative arithmetic, not a tax estimate. A couple bought a San Jose house in 1990 for 300,000. It is worth 2,000,000 today.
If they sell it together, the gain is 1,700,000. The married home sale exclusion takes off 500,000, so 1,200,000 is taxed. Between federal and California, that bill can run around a third of it.
Now say one spouse dies and the house is community property. The survivor's basis becomes 2,000,000. If they sell soon after for 2,000,000, the gain is zero.
If only the half that passed gets stepped up, the survivor's basis is 150,000 plus 1,000,000, or 1,150,000. The gain is 850,000. A surviving spouse who sells within two years of the death and has not remarried can generally still use the 500,000 exclusion, so about 350,000 is taxed. It is the same house at the same price, and the bill is wildly different.
The title on the deed decides which answer you get.
The double step up depends on the asset actually being community property, and the deed or account title is where that starts. Since 2001, California has let couples hold title as community property with right of survivorship. It keeps the community character and passes to the survivor without probate.
Joint tenancy is the common trap. Lots of California couples took title that way because a lender or escrow officer suggested it. Joint tenancy can read as each spouse owning a separate half, and then the survivor may have to show the property really was community property to get the second step up. A living trust can hold community property too, but only if the trust says so.
Separate property follows its own rule. Something one spouse owned before the marriage, inherited, or got as a gift only gets a new basis if it belonged to the spouse who died.
Some things never step up, and some step down.
Retirement accounts get no step up. An IRA or 401(k) a spouse inherits is still taxed as income when the money comes out. The same goes for the growth inside a deferred annuity.
The reset also works in both directions. If an asset is worth less than you paid when your spouse dies, the basis steps down to the lower value, and that loss is gone for good.
Get the value on paper. For real estate, that usually means an appraisal as of the date of death. For stock, the broker can usually supply the date of death value. Skip it and you may be stuck proving a number years later.
Before a survivor sells, the order of events matters more than the price.
A step up can make a sale close to tax free that would have cost a fortune a year earlier. Nobody plans around a death, and nobody should try. But the timing of a sale and the title on the deed both change the bill.
We are not going to list the structures that can change the tax on a sale. Which ones fit depends on facts only you have. After a full step up, the honest answer is often that there is nothing left to defer.
One more thing about incentives. We are paid when a client ends up in a product we offer. Nobody is paid when the answer is that the step up already took care of it. Weigh anything anyone tells you with that in mind, us included.
Before you decide
Questions worth asking.
Is each thing we own titled as community property, joint tenancy, or something else, and does that title match what we actually intend?
If one of us died today, which of our assets would get a full step up, a half step up, or none at all?
Which of our accounts, like IRAs, 401(k)s and annuities, get no step up, and how will the survivor be taxed on them?
Who will get a date of death appraisal on the house, and where will those records be kept?
If I am the survivor, how does the timing of a sale change the exclusion I can use?
If you are recommending we sell or restructure anything now, what step up would we give up by doing it, and how are you paid on it?
Related
Does California have a double step up in basis?
Yes, for community property. Under federal law, when one spouse dies, both halves of community property get a new basis equal to market value on the date of death, not just the half that belonged to the spouse who died.
Does joint tenancy get a full step up in basis in California?
Not automatically. Joint tenancy can be treated as each spouse owning a separate half, which steps up only the half that passed. The survivor may need to show the property was community property to get the second half. Community property with right of survivorship avoids that question.
Does an inherited IRA or 401(k) get a step up in basis?
No. Retirement accounts get no step up. A surviving spouse pays income tax on withdrawals much the way the original owner would have.
Can a surviving spouse still use the 500,000 home sale exclusion?
Generally yes, if the home is sold within two years of the death, the survivor has not remarried, and the couple met the ownership and use rules right before the death.
Can the basis go down when a spouse dies?
Yes. The basis resets to market value on the date of death either way. If the asset is worth less than what was paid, the basis steps down and that loss disappears.
Where this fits.
This question sits inside a bigger one. Tax Deferred Strategies walks through the whole decision rather than this one piece of it.
On Point Finances is a licensed insurance agency, not a tax, legal, or investment adviser. This page is general education, not a recommendation, and reading it does not create a client relationship.