Calculating StepUp in Basis for Homes

I recently had a client, Emily, whose mother passed away owning a home in Escondido valued at $1.3 million. Emily was relieved to avoid probate – her mother had a properly funded trust – but then she received a hefty property tax bill. The confusion stemmed from a miscalculation of the step-up in basis and the implications of Proposition 19. She’d assumed a full transfer, but the reality was far more complex, costing her an unexpected $18,000 in reassessed taxes. This scenario isn’t unusual; the interplay of state and federal laws often creates these pitfalls.

What is Step-Up in Basis, and Why Does it Matter?

The “step-up” in basis is a critical benefit of estate planning. When you inherit an asset – whether it’s stocks, bonds, or real estate – your tax basis is adjusted to the fair market value of the asset on the date of the decedent’s death. This means you only pay capital gains taxes on the appreciation in value from the date of inheritance to the date of sale. Without this step-up, the inherited asset would carry over the original owner’s cost basis, potentially resulting in significant, and unnecessary, tax liabilities. As an attorney and CPA with over 35 years of experience, I’ve seen firsthand how maximizing this benefit can save families substantial sums.

How Does Proposition 19 Affect the Step-Up in Basis?

California’s Proposition 19 complicates the step-up calculation, particularly for real property. It allows for a transfer of a parent’s low property tax base to their children, but only under very specific conditions. Under Proposition 19, heirs only keep a parent’s low property tax base if they move into the home as their primary residence within one year. Critically, for 2026, the tax-free ‘basis boost’ is capped at $1,044,586 over the original taxable value; any value exceeding this adjusted cap results in a partial reassessment even if the child moves in. Emily’s mother’s home exceeded this cap, triggering a reassessment on the portion of the value above the $1,044,586 limit. This often leads to the mistaken assumption that the entire home receives the step-up benefit, which is simply not true.

The CPA Advantage: Valuation and Capital Gains Planning

Accurate valuation is paramount when determining the step-up in basis. As a CPA, I’m uniquely positioned to handle this crucial aspect. A professional appraisal isn’t always required, but it’s often advisable, especially for properties with unique features or complex ownership structures. More importantly, understanding the capital gains implications before selling is key. We can explore strategies to minimize your tax burden, such as spreading the sale over multiple years or utilizing capital loss harvesting. Furthermore, the estate plan can be structured to take advantage of the increased basis, potentially avoiding significant capital gains taxes down the line. I’ve frequently used this approach to successfully guide clients through difficult estate and tax situations.

What About Homes with Joint Ownership and Multiple Beneficiaries?

The step-up calculation becomes even more complex with joint ownership or multiple beneficiaries. For deaths occurring on or after April 1, 2025, assets exceeding $208,850 generally trigger full probate. However, per Probate Code § 13050, this calculation MUST exclude all California-registered vehicles (regardless of value), boats, and up to $20,875 in unpaid salary. Furthermore, AB 2016 now allows a simplified ‘Primary Residence’ petition for homes valued up to $750,000, significantly expanding probate shortcuts. The portion of the home owned by the deceased is subject to the step-up, while the portion owned by surviving joint owners is not. With multiple beneficiaries, the allocation of the step-up can be customized in the estate planning documents, offering flexibility and strategic tax planning opportunities.

How do California courts decide whether a will reflects true intent or creates ambiguity?

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.

• Preparation: Review estate planning regularly.
• Validation: Check legal requirements.
• People: Update personal information.

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.

Controlling Legal Standards Governing California Estate and Asset Transfers

• Probate & Court Procedure:
  California Courts – Wills, Estates, and Probate
  The official judicial branch guide for navigating the probate process; it provides updated 2026 checklists for determining if an estate qualifies for “Summary Probate” under the $208,850 personal property limit or the $750,000 primary residence threshold (AB 2016).
• Property Tax Reassessment (Prop 19):
  California State Board of Equalization (Prop 19)
  The definitive resource for understanding the “Parent-to-Child” reassessment exclusion; it outlines the strict one-year deadline for heirs to move into an inherited home as their primary residence to maintain the parent’s low property tax base.
• Advance Healthcare Planning:
  California Attorney General – Advance Health Care Directive
  Provides the official California statutory form and legal guidelines for appointing a health care agent; this resource emphasizes the necessity of combining a medical power of attorney with a HIPAA release to ensure doctors can communicate with family during an emergency.
• Federal Estate & Gift Tax:
  IRS Estate Tax Guidelines
  The authoritative federal portal for estate and gift tax reporting; this page reflects the 2026 “OBBBA” permanent exemption of $15 million per person, effectively replacing the previously scheduled Tax Cuts and Jobs Act (TCJA) sunset.
• Digital Asset Access (RUFADAA):
  California RUFADAA Law (Probate Code §§ 870-884)
  Access the full statutory text of the Revised Uniform Fiduciary Access to Digital Assets Act; it explains why executors are legally barred from accessing encrypted accounts, email, or crypto-wallets unless the decedent provided explicit “prior consent” in their estate plan.