The stepped-up basis is one of the most valuable provisions in the tax code for families inheriting real estate — and a date-of-death appraisal is what makes it defensible.
What “Basis” Means
Cost basis is the figure the IRS uses to measure gain when a property is sold. For a home someone buys and holds, basis starts at the purchase price and adjusts for capital improvements over time. When the property is sold, tax is generally owed on the difference between the sale price and that basis.
How the Step-Up Works
Under IRC §1014, property acquired from a decedent takes a new basis equal to its fair market value on the date of death. Decades of appreciation that built up during the owner’s life are effectively wiped off the taxable slate. If heirs sell shortly after inheriting, there may be little or no taxable gain at all.
California’s Double Step-Up
California is a community property state, which can produce a “double step-up.” When one spouse passes, both halves of a community-property home can receive the new date-of-death basis — not just the deceased spouse’s half. For long-held Orange County homes that have appreciated substantially, the difference to the surviving spouse can be significant.
Why the Appraisal Is the Proof
When an inherited property is later sold, the title company reports the sale to the IRS. If the heirs claim a stepped-up basis but cannot substantiate it, the IRS can challenge the figure — and without a qualified retrospective appraisal, it may disallow the step-up, assess tax on the full historical appreciation, and add penalties and interest. A USPAP-compliant date-of-death appraisal is the documentation that backs the number up.
Timing and Retrospective Dates
A step-up appraisal is almost always retrospective — its effective date is the date of death, which may be recent or years in the past. Reconstructing value for a past date is standard appraisal work: historical MLS data and public records let a certified appraiser establish fair market value as of that specific day with confidence.
This guide is general information, not legal or tax advice. Consult your CPA or estate attorney about your specific situation.