How does stepup in basis work for a sold home

I recently had a client, Emily, lose a significant portion of her potential inheritance simply because her mother’s estate wasn’t properly handled. Emily’s mother passed away expecting her home to pass directly to her, avoiding probate. Unfortunately, the lack of a clearly drafted codicil to her Will specifying digital asset access—and a rapidly changing legal landscape around those assets—meant Emily spent over $8,000 in legal fees just to unlock the online accounts containing the information needed to facilitate the transfer. This is a tragically common scenario, and it highlights the importance of proactive estate planning. But today, we’re going to focus on a different, often overlooked element: the critical tax implications of a home’s sale following a parent’s death, specifically regarding step-up in basis.

As an Estate Planning Attorney and CPA with over 35 years of experience, I frequently work with clients to minimize capital gains taxes when real property is involved. The “step-up in basis” is arguably the single most valuable tax benefit available to many estates. When a home passes from a parent to a child, the child’s cost basis in that property is effectively “stepped up” to the fair market value of the home on the date of the parent’s death. This means they only pay capital gains taxes on any appreciation after the date of death, rather than on the entire value of the home since the parent originally purchased it.

Let’s illustrate. Suppose your mother bought a home for $100,000 in 1980. At the time of her death in 2024, the home is worth $800,000. If you inherit the home directly, your cost basis becomes $800,000. Now, let’s say you sell the home for $900,000. Without the step-up in basis, your capital gain would be $800,000 ($900,000 – $100,000). However, with the step-up, your capital gain is only $100,000 ($900,000 – $800,000), resulting in a dramatically lower tax liability. The difference can be substantial, potentially saving tens of thousands of dollars.

What about AB 2016 and the Petition for Succession?

California’s Assembly Bill 2016 significantly streamlined the process of transferring a primary residence to heirs, but it doesn’t automatically guarantee step-up in basis. For deaths on or after April 1, 2025, a primary residence valued up to $750,000 qualifies for a ‘Petition for Succession’ under AB 2016 (Probate Code § 13151). This is a powerful tool, allowing for a faster, less expensive transfer than traditional probate. However, it’s crucial to understand that filing a “Petition” requires a Judge’s Order; it is not the same as a simpler affidavit. The process itself doesn’t create the step-up in basis. Step-up in basis is a tax rule, not a probate procedure.

Moreover, to qualify for the Petition, the decedent’s other non-real estate assets (cash, stocks, etc.) must typically remain below the separate $208,850 Small Estate limit. We often see families attempt to use AB 2016 when the overall estate exceeds this limit, which can create significant complications down the line. The Small Estate Affidavit (strictly for real property <$69,625, used for timeshares/vacant land) is also available, but doesn't have the same advantages as AB 2016 and is applicable only to smaller estates.

The Importance of Professional Valuation

Accurately determining the fair market value of the home on the date of death is paramount. The IRS scrutinizes these valuations, and a low appraisal could trigger an audit. As a CPA, I’m uniquely positioned to assist with this process, ensuring a defensible valuation is established. The cost of a professional appraisal is minimal compared to the potential tax savings and penalties associated with an inaccurate valuation.

Don’t Forget Prop 19

If the child intends to keep the home as their primary residence, it’s also important to consider Prop 19. Under Prop 19, heirs can only keep a parent’s low property tax base if they move into the home as their primary residence within one year and the home’s value is within specific limits. Failing to meet these requirements could result in a significant increase in property taxes.

What standards do California judges use to determine a will’s true meaning?

In California, a last will and testament operates within a probate system that emphasizes intent, clarity, and procedural compliance. When properly drafted, a will does more than distribute property—it creates legally enforceable instructions that guide courts, fiduciaries, and beneficiaries through administration with fewer disputes and less uncertainty.

When a will is drafted with California probate review in mind, it becomes a stabilizing roadmap rather than a source of conflict. Clear intent, proper authority, and compliant execution protect both families and estates.

Resources for Asset Management & Transfer

• Property Tax Reassessment: California State Board of Equalization (Prop 19)
  This page details the “Base Year Value Transfer” rules. It explains that heirs can only avoid a property tax reassessment if the inherited home becomes their primary residence and a claim is filed within one year of the date of death.
• Real Estate Probate (AB 2016): California Probate Code § 13151 (Petition for Succession)
  The specific statute for the AB 2016 process. It outlines the requirements for using a court-approved “Petition” (not an affidavit) to transfer a primary residence worth $750,000 or less (gross value) for deaths occurring after April 1, 2025.
• Small Estate Affidavit: California Probate Code § 13100 (Personal Property)
  Access the statutory language for the “Small Estate Affidavit.” This procedure is strictly for Personal Property (cash, stocks, vehicles) and is limited to estates with a total value of $208,850 or less (effective April 1, 2025).
• Federal Estate Tax: IRS Estate Tax Guidelines
  The authoritative federal resource for estate valuation. It reflects the 2026 exemption increase to $15 million per person established by the One Big Beautiful Bill Act (OBBBA), which is critical for high-net-worth asset planning.
• Unclaimed Assets: California State Controller – Unclaimed Property
  The primary portal for executors and heirs to search for “lost” assets—such as forgotten bank accounts, uncashed dividends, and insurance benefits—that have been remitted to the State of California for safekeeping.
• Business/LLC Compliance: FinCEN – Beneficial Ownership Information (BOI)
  The official portal for corporate transparency reporting. While many domestic U.S. LLCs received exemptions in 2025, executors managing foreign-registered entities or specific non-exempt structures must still consult this resource to ensure compliance.