Calculating StepUp in Basis for Homes

Dax recently lost his mother, Evelyn, and discovered a glaring problem with her estate plan: a poorly drafted codicil attempting to transfer her home to him. The original trust was solid, but the handwritten addendum was deemed invalid due to insufficient witnesses and lacked the required formalities. Now, Dax faces a full probate proceeding, costing his family upwards of $60,000 in legal fees and delaying access to the property for nearly a year. This illustrates the critical importance of regularly reviewing and formally updating your estate planning documents.

As an estate planning attorney and CPA with over 35 years of experience, I frequently advise clients on minimizing estate taxes and maximizing the value of assets passed down to their heirs. A powerful, often overlooked strategy is understanding and leveraging the “step-up in basis” for inherited property, particularly real estate. Many clients assume simply inheriting an asset means it’s tax-free, but that’s only partially true. While the transfer itself avoids income tax at death, future capital gains can be significant. The step-up in basis can dramatically reduce – or even eliminate – those gains.

Let’s unpack what that means. Imagine Evelyn purchased her home for $200,000 decades ago, and it’s now worth $1.5 million at the time of her passing. If Dax were to sell it immediately, he’d face a substantial capital gains tax on $1.3 million. However, because he inherited the property, the tax basis “steps up” to the fair market value on the date of Evelyn’s death – $1.5 million. If Dax then sells the home for that same $1.5 million, there’s no capital gains tax due. This is where my CPA background is invaluable. Most attorneys focus on the legal transfer; I also focus on the tax implications, ensuring my clients’ beneficiaries pay the least amount possible.

However, the rules surrounding this benefit have become increasingly complex, especially in California. 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. This means careful planning is essential to avoid unintended tax consequences.

Furthermore, the One Big Beautiful Bill Act (OBBBA) permanently established the Federal Estate Tax Exemption at $15 million per person ($30 million for couples) effective Jan 1, 2026. This eliminates the ‘2026 Sunset’ fear, though the top tax rate remains at 40% for assets exceeding this permanent threshold, which is now indexed annually for inflation. While most Californians won’t be impacted by the estate tax itself due to the high exemption, understanding the interplay between estate tax and basis step-up is vital when structuring larger estates.

Beyond the home, the step-up applies to all appreciated assets – stocks, bonds, artwork, business interests, and more. Proper valuation is crucial. An inaccurate valuation can trigger an IRS audit. As a CPA, I am well-versed in establishing defensible fair market values, minimizing potential challenges.

Probate avoidance is often a primary goal for my clients. 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.

Digital assets also present unique challenges. Per the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA), custodians like Apple or Google are legally prohibited from granting executors access to the content of emails or private messages without ‘explicit written direction’ in the will or trust. Metadata (the ‘catalog’) may be accessible, but the private content remains locked without this specific legal trigger. This highlights the need to address digital asset access in your estate plan.

Finally, if you own a business, such as an LLC, be aware of the Corporate Transparency Act (CTA). Under the Corporate Transparency Act (CTA), all non-exempt small businesses must maintain active BOI Reports with FinCEN. Upon the death of a member, the estate or successor has exactly 30 days from the date the estate is settled to file an updated report; failure to meet this window triggers non-waivable fines of $500 per day. Keeping these reports current is critical for business continuity.

• What is the ‘step-up in basis’? It’s the increase in the tax basis of an inherited asset to its fair market value on the date of the decedent’s death, reducing potential capital gains taxes.
• Does the step-up apply to all assets? Yes, it applies to most appreciated assets, including real estate, stocks, bonds, and business interests.
• What is Proposition 19’s impact? It limits the property tax benefits for inherited real estate unless the heir uses it as their primary residence within one year, and caps the tax-free basis boost.
• What is the federal estate tax exemption? The OBBBA permanently set the federal estate tax exemption at $15 million per person ($30 million for couples) as of 2026.

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

In California, a last will and testament is reviewed under probate standards that focus on intent, capacity, and execution. Clear drafting reduces ambiguity, limits misinterpretation, and helps families avoid unnecessary conflict during estate administration.

• Preparation: Review estate planning regularly.
• Law: Check statutory rules.
• Parties: 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 permanent exemption of $15 million per person (effective Jan 1, 2026), 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.