What Happens with Capital Gains Tax When You Inherit a Home in California?
An example involving a daughter navigating her mother’s trust illustrates how the step-up in basis works.
When Samantha’s mother, Mary Lou, passed away earlier this year, Samantha found herself navigating the responsibilities of trust administration for the first time. Mary Lou had thoughtfully set up a revocable living trust and named Samantha as the successor trustee. Still, there were unfamiliar decisions ahead—one of the biggest being what to do with her mother’s longtime California home.
Samantha was considering selling the home but wasn’t sure what the tax consequences might be. The property had appreciated significantly over the years, and she was concerned about whether she’d owe capital gains tax on the sale.
The Step-Up in Basis: What It Means
In situations like this, when a home is held in a revocable trust that becomes irrevocable upon the owner’s death, the step-up in basis rule typically applies. This means the cost basis of the home is adjusted to its fair market value as of the date of death.
So, although Mary Lou originally bought the home for much less, the capital gains tax would not be based on that original purchase price. Instead, if Samantha sells the property, the tax would generally apply only to the difference between the sale price and the home’s value at the time of her mother’s passing.
If the home is sold for an amount equal to or less than its stepped-up basis, there would likely be no capital gains tax owed.
Timing Can Make a Difference
Selling a property within one year of the decedent’s death often helps preserve the benefits of the step-up in basis, especially if the sale price remains close to the property’s value at the date of death.
There’s also the option for the executor or trustee to elect an alternate valuation date, which is either six months after the date of death or the actual date of sale (if sold within that six-month period). This election can influence the basis used and potentially reduce tax liability, depending on market conditions.
Confirming the Details
While the step-up in basis is a powerful tool for minimizing capital gains tax, it’s important to review the trust terms and how the property is vested. In Samantha’s case, she worked with a law firm to confirm the trust’s structure and ownership details, ensuring the home qualified for the stepped-up basis treatment.
She also consulted with a tax advisor to confirm that her plans aligned with current tax regulations and her broader financial strategy—a step we always recommend.
If you’re managing a trust or preparing to sell inherited property, we’re here to help.
Our team offers free consultations and flat fees for trust administration to make the process as straightforward as possible.
You can schedule a meeting with Attorney Joey Campbell at Kaminski Law Group here:
