Does a surviving spouse get a full step-up in basis in California?

Why the survivor's half is a big deal

When someone dies, the property they leave behind generally gets a new tax basis equal to its fair market value on the date of death. Basis is the number you subtract from the sale price to figure your taxable gain.

For a married couple, the question is what happens to the half that belonged to the spouse who is still alive. Outside community property states, the usual result is that only the half owned by the spouse who died gets the new basis. The survivor's half keeps its old basis.

Community property works differently. Under the federal tax code, the survivor's half of community property is treated as if it were inherited too, as long as at least one-half of the whole community interest was included in the decedent's gross estate. IRS Publication 555 puts it plainly: the total fair market value, even the part belonging to the surviving spouse, generally becomes the basis of the entire property.

That can be a very large number in a long-held California house. It is the one tax rule that makes CPAs smile in public.

A hypothetical with round numbers

Say a couple bought a house decades ago for $200,000, and it was community property. One spouse dies, and the house is worth $1,500,000 on the date of death.

If the survivor later sells for $1,550,000, the gain is figured from the basis. With the full step-up, the gain is $50,000. With only half stepped up, it is $700,000. Same house, same sale, very different tax conversation.

These numbers are made up to show the mechanics. Your CPA will apply the actual rules to your facts, including any exclusion you may qualify for on the sale of a home.

How title was held can change the answer

California is one of nine community property states listed in Publication 555: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. But being married in California does not automatically make every asset community property for this rule.

The deed matters. Under federal estate tax law, property held by spouses as joint tenants with right of survivorship, when they are the only joint tenants, is a qualified joint interest, and only one-half of its value is included in the decedent's estate. That is a different rule from the community property step-up, and whether a joint tenancy house is really community property is a question for your CPA and attorney.

California also has a title called community property with right of survivorship. Under Civil Code 682.1, it is created when the transfer document expressly declares it and the spouses accept it in writing on the document. It passes to the survivor without administration.

One more detail from Publication 555: this basis rule does not apply to registered domestic partners. Many couples have never looked at their deed since closing. Go look. It takes ten minutes.

The step-up needs a number, and the number needs proof

The full step-up only helps if you can show what the house was worth on the date of death. The tax standard is fair market value: the price between a willing buyer and a willing seller, neither forced to act, both knowing the relevant facts. It is not a forced sale price, and it is not the value today.

That calls for a retrospective appraisal, meaning an appraisal as of a past date. I look at sales that closed around the date of death, measure how the market was moving right then, and describe the house as it was, not after the grief cleanout and fresh paint.

A good report shows the comparable sales and explains every adjustment. If the IRS or a buyer's tax preparer ever asks how the basis was set, you want a report that teaches the market, not a single number with a signature under it. A screenshot of an online estimate from two years later is a souvenir, not evidence.

Mistakes I see families make

The first mistake is assuming the house only needs a value when it sells. By then the survivor may have replaced the roof, redone the kitchen and forgotten what the place looked like on the date that counts. An appraiser can still do the work years later, but photos and records from that time make the report stronger.

The second is using the purchase price of a later sale as the date of death value. If the survivor sells two years later in a different market, that sale price answers a different question. Markets move. The value has to be measured as of the date of death, using the sales and the trend around that date.

The third is skipping the step because no estate tax return is due. The basis rule does not care whether the estate was big enough to owe estate tax. The survivor still benefits from a well supported number, and without one, a CPA is left guessing on the most valuable asset the family owns.

What to do after a spouse passes

1. Pull the recorded deed and note exactly how title was held: community property, community property with right of survivorship, joint tenancy, or a trust.
2. Give the deed and any trust documents to your CPA and ask whether the full step-up applies.
3. Order a date of death appraisal from a licensed appraiser, even if you plan to stay in the house for years.
4. Gather records of the house as it was: photos, old listing pictures, permits and repair invoices.
5. Keep the appraisal with your permanent tax records. You may not sell for a decade, and memories fade faster than paperwork.

This is general information. Tax treatment depends on the facts, so confirm with a CPA or tax attorney.