If the title was "Joint with right of survivorship" as it is usually in California, then 50% of the property is owned by the deceased spouse. When the living spouse inherits it - the living spouse gets the "stepped up" basis on that 50%, i.e.: the living spouse's basis becomes the FMV at the time of death. The 50% ownership should be reported in the estate tax return and taxed accordingly.
What it means is that only 50% of the gains get the stepped up basis treatment, the other 50% remain as capital gains of the remaining living spouse.
The title transfer does not reset the clock. I.e: if the deceased spouse owned the 50% stake more than a year - it remains long term capital gain for the living spouse when the property is sold, even if it is the next day.
You can read more information on this nicely written page.