Capital Gains on Inherited Property in California
Inherited real estate in California receives a stepped-up basis to the fair market value on the date of death. That single rule dramatically reduces the taxable gain when heirs sell. The nuance is in the timing, the appraisal, and the difference between community and separate property.
How the stepped-up basis works
For federal capital gains purposes, the heir's basis in the property is the fair market value on the date of the decedent's death, not the original purchase price. A home bought decades ago for a small fraction of today's value can be sold soon after inheritance with little or no taxable gain.
The gain the heir reports is the difference between the sale price and the stepped-up basis, adjusted for selling costs. Selling within a year of the date of death typically produces minimal federal gain.
Community property gets a full step-up
For married couples in California, community property receives a full step-up in basis on the first spouse's death, not just the deceased spouse's half. Surviving spouses who sell soon after the first death often owe little federal capital gains tax.
This is a California advantage. Separate-property states step up only the deceased spouse's half.
The appraisal establishes the basis
A date-of-death appraisal, ideally from the probate referee or a qualified appraiser, documents the fair market value. Keep it with the estate records. Without it, the IRS may challenge the basis if the property is audited.
For estates in probate, the probate inventory and appraisal serve the same purpose. For assets in trust, an independent appraisal at the date of death is worth commissioning.
When holding creates exposure
The step-up is a one-time event. Any appreciation after the date of death is a normal capital gain when the heir sells. If heirs hold the property for years, the market can create real taxable exposure.
Heirs who plan to hold should consider whether to occupy the property as a primary residence to qualify for the personal residence exclusion, or whether a 1031 exchange applies if the property is placed in service as a rental.
Key Takeaways
- ◆Inherited property gets a stepped-up basis to date-of-death fair market value.
- ◆California community property receives a full step-up on the first spouse's death.
- ◆Document the basis with a date-of-death appraisal and keep it with estate records.
- ◆The step-up is one-time. Long holds reintroduce taxable gain on later appreciation.
Frequently Asked
+Do I owe capital gains tax if I sell an inherited home right away?
Usually very little. The basis is stepped up to fair market value on the date of death, so a sale soon after inheritance often produces minimal gain, limited to any appreciation between the date of death and the closing.
+Does California have a separate inheritance or estate tax?
California currently has no state-level inheritance or estate tax. Federal estate tax applies only to estates above the federal exemption. Consult a CPA for current thresholds.
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