What Is Stepped-Up Basis and How Does It Reduce Taxes on an Inherited Home?

Educational overview only. Always consult a qualified tax professional or estate attorney regarding your specific situation.

When families or a spouse sell a home after a loved one passes away, taxes are rarely top of mind — but they can have a major financial impact. What many homeowners don’t realize is that there is a powerful tax rule that can dramatically reduce those taxes. It’s called stepped-up basis, and it’s one of the most valuable (and least understood) benefits tied to homeownership.

This article explains the concept in plain language, so you know what questions to ask and what to be mindful of when navigating an inherited property.

The Big Idea
When someone inherits a home, the IRS often allows a reset of the home’s value to its current market value at the time of the owner’s death. The one inhereting the home needs to contact a qualified professional to determine the fair market value of the property at the date of death; an appraiser or a qualified real estate professional. This reset can effectively erase decades of appreciation for tax purposes and eliminate capital gains.

In simple terms:
A home that gained value over many years may be sold with little or no capital gains tax — if the stepped-up basis applies.

Why This Matters So Much in the Bay Area
Many Bay Area homeowners purchased their homes decades ago, when prices were significantly lower.
As a result:
- Homes bought for hundreds of thousands may now be worth millions
- Selling without understanding tax rules can lead to large, avoidable tax bills
- Stepped-up basis can change the financial outcome entirely

For many families or spouses, this single rule can mean saving hundreds of thousands of dollars.

A Simple Example
Your parents bought their home for $500,000. At the time of their passing, the home is worth $1,500,000.
- Without stepped-up basis (hypothetical):
Selling at $1,500,000 could trigger taxes on a $1,000,000 gain.
- With stepped-up basis (how it typically works):
The home’s tax value resets to $1,500,000.
Selling at that price results in $0 capital gain with the stepped up basis. 

Without the stepped up basis the person inheriting the property would expect to pay 15% to 20% on the net proceeds from the sale.

That difference alone can dramatically affect a family’s finances.

Important Things to Know
Stepped-up basis is powerful, but it doesn’t apply the same way in every situation.
A few key points to keep in mind:
- The reset applies only to appreciation up to the date of death
- Future gains after inheritance may still be taxable
- Establishing accurate market value is critical and requires professional valuation
- Rules can vary based on ownership structure and estate planning
This is why professional guidance is essential before making decisions.

Why Families Often Overpay Taxes

In our experience, families often overpay capital gains tax simply because they don’t know this rule exists.
Many long-time Bay Area homeowners are asset-rich after decades of appreciation.
Understanding stepped-up basis can:
- Help prevent unnecessary taxes
- Improve estate planning conversations
- Provide clarity when deciding whether to sell or hold inherited property

Final Thought

At the end of the day, optaining the stepped up basis valuation is a fairly simple process, and one that could potentially save you hundreds of thousands of dollars in capital gains taxes.

Every situation is unique, and professional guidance is essential. If you’re navigating a property transfer due to life changes, we are always happy to help explain the real estate side and connect you with trusted local professionals.

Quick Answer:
Stepped-up basis is a tax rule that often resets an inherited home’s tax value to its current market value at the time of death. This can eliminate decades of built-in capital gains and significantly reduce — or even eliminate — capital gains taxes when the home is sold.