Of all the conversations I have with older sellers in Silicon Valley, few surprise people more than this one. A couple buys a home in San Jose, Los Altos, or Cupertino in the 1970s or 1980s, raises their family there, and watches it climb to $2 million, $3 million, or more. One spouse dies, and the surviving spouse assumes that when they eventually sell, they’ll face capital gains tax on most of that growth. In California, that’s often not true, and the reason is a federal tax rule for community property that can wipe out most or all of the gain. This article explains how the double step-up works and the title issue that can cost a family hundreds of thousands of dollars without anyone realizing it. It’s part of my larger guide to capital gains when selling a Silicon Valley home you have owned for 30 years or more.
Key Takeaways
Summary: When a California spouse dies, a home held as community property can get a stepped-up basis on the whole house, not just half, and the heirs get another step-up at the second death. How title was held can decide whether a widow or widower faces a large capital gain or almost none.
From my practice: Proving basis years later can be harder than anyone expects. More than a year after I closed a sale for a family, their tax preparer needed the original purchase basis, and nobody had the paperwork. I worked with the title company to track down the recorded deeds from more than two decades earlier. Whether you’re a surviving spouse or an heir, gather the purchase records, the date-of-death value and any improvement records before you sell.
How the Step-Up Normally Works
When someone dies, the property they owned generally receives a new tax basis equal to its fair market value on the date of death. For a married couple outside a community property state, that usually means only the deceased spouse’s half gets the new basis. The surviving spouse’s half keeps the original purchase price. California, as a community property state, is treated differently. If the home was community property, both halves are stepped up at the first death.
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A Los Altos Example
A couple bought their Los Altos home in 1985 for $350,000. The husband dies when the house is worth $3,200,000. A year later the widow sells for $3,300,000 with about $170,000 in selling costs.
| Community property | Joint tenancy, half stepped up | |
|---|---|---|
| Basis after husband’s death | $3,200,000 (whole house stepped up) | $175,000 (her half at cost) plus $1,600,000 (his half stepped up) = $1,775,000 |
| Amount realized ($3,300,000 minus $170,000) | $3,130,000 | $3,130,000 |
| Gain before exclusion | None, a small loss | $1,355,000 |
| Home sale exclusion, sold within two years of death | Not needed | ($500,000) |
| Taxable gain | None | $855,000 |
The difference in the second column could easily mean a federal and California tax bill of a quarter million dollars or more. The house, the couple, and the sale price are the same. The only difference is how the property was treated for tax purposes. The numbers are simplified, and improvements would add to basis, but the pattern is real.
The Title Question
Many couples who bought homes in the 1970s and 1980s took title as “husband and wife as joint tenants,” often because a title officer or escrow suggested it to avoid probate. Joint tenancy does avoid probate, but for tax purposes the IRS may treat it as joint tenancy under Internal Revenue Code section 2040(b), with only the deceased spouse’s half stepped up, unless the couple can show the home was actually community property. In 2001, California created a form of title under Civil Code section 682.1, community property with right of survivorship, that gives couples both probate avoidance and the full step-up. Many living trusts also include a declaration that the couple’s assets are community property.
If you’re married and still living, pull your deed and your trust and ask your estate attorney whether your home is clearly characterized as community property. Fixing it now is usually a simple document. If your spouse has already died and title says joint tenancy, don’t assume you only get a half step-up. There may be evidence, such as a trust declaration or how the home was acquired and paid for, that supports community property treatment. That’s a question for your CPA and attorney before you sell.
A real example: The first thing I check on any sale after a death is how title was held. On one inherited home, I pulled the grant deed the afternoon of the family’s first call and found it was held in joint tenancy, which meant no probate and a simple recording of the death certificate at closing. For married couples, the difference between joint tenancy and community property on that deed can change how much of the house gets a new basis, so it’s worth pulling yours now.
What the Surviving Spouse Should Do
- Get a date-of-death appraisal. A retrospective appraisal as of the date of death is the key document supporting the new basis. It can be done later, but it’s easier and more reliable done soon after.
- Review title and the trust. Confirm with the attorney how the home was held and whether it qualifies as community property.
- Update title. If the home was in a trust, the trust attorney will handle the paperwork after the death. If it was in joint tenancy, an affidavit of death of joint tenant is typically recorded.
- Consider the timing. If there’s any gain left after the step-up, selling within two years of the death may preserve the $500,000 exclusion for a surviving spouse. See the widow’s $500,000 home sale exclusion.
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The Second Step-Up
If the surviving spouse keeps the home until their own death, the heirs receive another step-up to the value at that time. That can make holding the home a reasonable choice for some widows and widowers, especially when the house still fits their needs and they have other resources. For others, safety, care needs, or loneliness make selling the right move, and the first step-up often means they can sell with little or no tax. I walk through that decision in sell now or let the kids inherit, and I cover the broader emotional and practical side in selling a Silicon Valley home after your spouse died.
For the full capital gains picture, go back to my guide to capital gains when selling a Silicon Valley home you have owned for 30 years or more.
Sources and Further Reading
- IRS Publication 555, Community Property
- IRS Publication 551, Basis of Assets
- IRS Publication 523, Selling Your Home
Frequently Asked Questions
What is the double step-up in basis in California?
When a married couple’s home is community property, the whole home generally receives a new tax basis at the first spouse’s death, and the heirs receive another step-up at the second spouse’s death.
Does joint tenancy get a full step-up in California?
Not automatically. The IRS may treat joint tenancy between spouses as giving a step-up on only the deceased spouse’s half, unless the couple can show the property was community property.
What is community property with right of survivorship?
A form of title available to California married couples that avoids probate like joint tenancy while supporting community property tax treatment, including the full step-up at the first death.
Do I need an appraisal when my spouse dies?
A date-of-death appraisal is strongly recommended because it documents the new tax basis. It can be prepared retrospectively if needed.
Can a surviving spouse still use the $500,000 exclusion?
Yes, if the home is sold within two years of the spouse’s death, the survivor hasn’t remarried, and the ownership and use tests were met before the death.
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