Most people facing this question are an adult child, a surviving spouse, or a newly named executor or successor trustee. They are holding the keys to a parent's house while siblings ask what a sale would leave everyone after taxes. They have heard the phrase "step-up in basis" and know it matters, but not how it works. They also want to know whether the county will raise the property tax while the house waits to be sold.
This page walks through the income tax on the sale, the California property tax rules that affect holding costs, and the federal estate tax in general terms. It describes how the rules work. It does not say what any particular estate or heir owes.
What Stepped-Up Basis Means for an Inherited House
Basis is the starting figure the tax law uses to measure gain. For a house someone bought, basis begins with what they paid. For a house received from someone who died, federal law generally resets it. Under 26 U.S.C. § 1014(a), the basis of property acquired from a decedent is generally "the fair market value of the property at the date of the decedent's death." The statute allows a different date where an election for alternate valuation is made, and it has other listed exceptions. This reset is what people mean by a "step-up."
Here is a hypothetical. A parent bought a house decades ago for a small price, and the house was worth far more on the day the parent died. The child who inherits it generally takes the higher date-of-death value as basis. The parent's decades of appreciation never count as taxable gain.
A gift during life works differently. The IRS's Frequently asked questions on estate taxes notes that "the rules are different for determining the basis of property received as a lifetime gift." There is also a narrow exception for appreciated property that comes back to the giver. Under 26 U.S.C. § 1014(e), appreciated property that the heir or the heir's spouse gave the decedent within one year before death keeps the decedent's adjusted basis.
California is a community property state. The IRS's Publication 551, Basis of Assets states that in community property states, including California, married individuals are each usually considered to own half the community property. When one spouse dies, the total value of the community property, "even the part belonging to the surviving spouse, generally becomes the basis of the entire property." That holds if at least half the community interest is includible in the decedent's gross estate.
The date-of-death value has to be documented. In a probate estate, that is usually the appraisal done for the inventory. Outside probate, a qualified appraisal as of the date of death often serves the purpose.
Capital Gains Tax When You Sell an Inherited House
The arithmetic comes from 26 U.S.C. § 1001(a). Gain is "the excess of the amount realized therefrom over the adjusted basis." Put plainly, the gain is roughly what the sale brings in, less the stepped-up basis as adjusted for any capital improvements. Selling costs can also affect the figures, as the section on selling costs below explains.
Timing works in the heir's favor. Under 26 U.S.C. § 1223(9), a person who receives property from a decedent, with basis set under 26 U.S.C. § 1014, is generally treated as having held it for more than one year, even if they sell it within a year after the death. The IRS's Publication 559, Survivors, Executors, and Administrators puts it this way: gain or loss on inherited capital assets "is considered long term, regardless of how long you held the property."
The seller reports and pays the tax. If the heir owns the house when it is sold, that is the heir. If the estate or trust still holds title, it may be the estate or trust. When siblings own the house together, each reports the share of the gain that matches their share of ownership.
Federal rates depend on the seller's taxable income and filing status, and the IRS publishes the current rates. California taxes the gain on the state return filed with the Franchise Tax Board, which publishes California's rates.
A CPA, an enrolled agent, or a tax attorney is the professional who reviews the gain calculation and the returns. Families weighing a sale against keeping or renting the house often compare these numbers in a keep, rent, or sell decision.
California Property Tax Reassessment and the Proposition 19 Rules
The death itself is the property tax event. The State Board of Equalization's Proposition 19 page explains that "the date of death is the date of change in ownership." California generally reassesses real property to current market value when ownership changes, and that can raise the yearly tax bill substantially while the family decides what to do with the house.
For deaths on or after February 16, 2021, Rev. & Tax. Code section 63.2 can exclude a parent-to-child transfer of a family home from reassessment, in whole or in part. Several conditions apply:
- The home was the parent's principal residence.
- It becomes the child's principal residence within one year of the transfer.
- The child files for the homeowners' or disabled veterans' exemption within a year.
- A claim is filed with the assessor.
A grandchild can qualify only if all of the grandchild's parents who are children of the grandparents have died. A rental house does not qualify, as the Board of Equalization's page explains.
The exclusion has a value cap. The Board of Equalization's Proposition 19 Fact Sheet states the limit as taxable value plus $1,044,586 for transfers from February 16, 2025, through February 15, 2027. Any market value above that limit is added to the taxable value.
Under Rev. & Tax. Code section 63.2, the claim is generally due within three years after the transfer, or before a transfer to a third party, or before the eligible transferee stops living in the home, whichever comes first. It is also timely if filed within six months after a supplemental or escape assessment notice is mailed. A late claim from an heir who still owns the house applies only going forward. The exclusion ends when the heir moves out. An heir who inherits and then sells without moving in does not meet the occupancy condition, so the house is generally reassessed as of the date of death.
Separately, Rev. & Tax. Code section 480 requires a change in ownership statement. In a probate estate, the personal representative files it at or before the time the inventory and appraisal is filed. Otherwise, the trustee or the heir files it within 150 days after the death.
Reassessment is a property tax matter handled by the county assessor's office, apart from income tax on the sale. That office handles exclusion claims and reassessment questions. The wider steps for an inherited home are laid out in what to do when you inherit a house.
California's No-Inheritance-Tax Rule and Federal Estate Tax
Families often ask whether the state takes a share before anyone inherits. California's position on estate and inheritance taxes is published by the State Controller's Office and the Franchise Tax Board. Whatever that position, the gain on a later sale is still reported on both the federal and the California income tax return.
The federal estate tax is a tax on the estate itself, measured before distribution. It is different from the income tax an heir pays on a sale. According to the IRS's estate tax FAQs, a federal estate tax return, Form 706, must be filed if the gross estate plus certain lifetime gifts exceeds the filing threshold for the year of death. The IRS publishes that threshold. The return is due nine months after the death, and an automatic six-month extension is available by filing Form 4768 by the due date. Whether a particular estate owes the tax depends on its size and makeup.
When an estate does file Form 706, Publication 551 explains that beneficiaries generally receive a Schedule A (Form 8971) from the executor reporting the estate tax value. Some beneficiaries must use that value as their basis.
Who reports a sale depends on who holds title when the sale closes. Publication 559 explains that when the estate owns the decedent's residence and the personal representative sells it during administration, the treatment depends on how the estate holds or uses the house. If the house was distributed first, the heir sells and reports. An estate's own income tax return is separate from the decedent's final individual return, which the personal representative files for the year of death.
Selling Costs That Reduce the Taxable Gain
Two different kinds of costs touch the gain, and they work in different ways. Some costs belong to the sale itself. Others are improvements to the house.
Costs of the sale bear on the "amount realized" in 26 U.S.C. § 1001. That is what the seller receives, measured as money plus the fair market value of other property received. Seller-paid closing items are the place to look. These can include real estate commissions, transfer taxes, title charges, and escrow fees. That list is partial, and which items qualify follows detailed IRS and Franchise Tax Board rules.
Capital improvements an heir makes after inheriting work differently. A new roof or a remodel, as opposed to routine repairs, can add to basis rather than reduce the sale proceeds.
Many people asking which "closing costs are tax deductible" are really asking a different question. On a sale, these costs generally change the gain calculation rather than appearing as a separate deduction. Ordinary property tax and repairs during the holding period are separate matters.
When a family has spent months clearing and repairing a parent's house, it can feel as though every receipt should count. A CPA or an enrolled agent reads the closing statement and the improvement records to sort which items actually change the numbers.
How to Report the Sale on Your Tax Return
Reporting follows the sale year. The IRS's FAQ on selling inherited property says that a sale for more than basis produces a taxable gain. It points to Publication 550 for reporting the sale on Schedule D of the federal return. Because inherited property counts as long-term, the sale is reported as long-term.
California residents report the gain on their California income tax return filed with the Franchise Tax Board.
A few documents usually anchor the return:
- Gather the date-of-death appraisal. In a probate estate this is usually the inventory and appraisal; otherwise it is the appraisal made as of the death.
- Keep the closing statement. Escrow issues the settlement statement that shows the price and the seller-paid costs.
- Collect improvement records. These are invoices for capital work done after inheriting.
- Save any Schedule A (Form 8971). The executor furnishes it only when an estate tax return was required.
One more item can appear at closing. Rev. & Tax. Code section 18662 generally requires the buyer to withhold 3 1/3 percent of the sales price and send it to the Franchise Tax Board, but only where the price exceeds $100,000 and the escrow holder has given written notice of the requirement. Withholding is excused if the seller certifies, under penalty of perjury, one of the listed exemptions. These include that the house was the seller's or the decedent's principal residence, or that the sale results in a loss or in no gain required to be recognized. Any amount withheld is credited on the seller's return.
Co-owners each report their own share on their own returns, using their share of the date-of-death value. If co-heirs cannot agree on a sale at all, that becomes a contested matter, which an attorney who litigates probate and trust cases handles. A CPA, an enrolled agent, or a tax attorney prepares these returns. The broader sequence of tasks appears in this estate settlement checklist.
