“Yesterday is gone. Tomorrow has not yet come. We have only today. Let us begin.” – St. Teresa of Calcutta.
“Step-up in basis” is a federal tax provision that adjusts the cost basis of inherited property to fair market value at the time of the original owner’s death. This can provide significant tax advantages for beneficiaries inheriting appreciated real estate, stocks, or other assets. This concept differs, however, depending on how the property is titled.
Sole Property: If ownership is in the name of one individual, the death of the owner results in a full step-up.
Example: George owns mutual funds purchased in a taxable account in his name in 1980 for $50,000. On December 31, 2025, the investments had grown to $3,600,000. George died on January 1, 2026. If George had sold the investments in December 2025, he would owe capital gains tax of $710,000 on the $3,550,000 in gain.
If George gifted the mutual funds to his stepson Jacky in December 2025, Jacky would take George’s basis and would owe the $710,000 in taxes if he sold the mutual funds in January. But if George listed Jacky as a “transfer on death” beneficiary of his account, Jacky inherits the mutual funds on January 1, 2026 and could liquidate the account in January, receiving $3,600,000 cash without reporting capital gains on his tax return.
Joint Tenancy: For assets held in joint tenancy, stepped-up valuation applies only to the deceased partner’s share of the property.
Example: George and Martha were married in 1981. They purchased a home that year in San Clemente, California, for $135,000. Their deed says: “George and Martha Washington, husband and wife as joint tenants.” When George died, the home’s fair market value was $2,000,000. Martha inherits the property without probate, since joint tenancy provides right of survivorship. Martha will have a new stepped-up basis only for George’s one-half interest in the property. The new basis will be $1,067,500. If Martha sells the home immediately after George’s passing, there is a gain of $932,500. Even utilizing the $500,000 capital gains exemption available for the couple since it was their home, she must report a $432,500 gain and owes $86,500 in taxes.
Community Property: Married couples in community property states like California have another option for holding property, providing an advantage. If George and Martha held title to the property as “George and Martha Washington, husband and wife as community property with right of survivorship,” upon George’s death, the property passes to Martha without probate and receives a full step-up in basis. As a result, Martha’s new basis in the property after George’s death would be $2,000,000, and she could sell the home without capital gains.
Conclusion: Evaluating how you hold title to property and planning for the disposition upon your death can provide significant advantages for your family.
949.285.4270 / SusanHattanLaw.com / Susan@SusanHattanLaw.com
903 Calle Amanecer, Suite 230, San Clemente, CA 92673
