Capital gains on an inherited house in California

Most heirs landing here have one big question: "Am I going to owe a fortune in capital gains if I sell?" The short answer for most California heirs is: usually no, thanks to the stepped-up basis rule. The longer answer involves several moving parts that affect timing — and missing one of them can cost real money. This guide walks through what matters.

Stepped-up basis: the rule that does most of the work

When someone dies and you inherit their property, the property's tax basis resets to its fair market value (FMV) on the date of death. This is called "step-up in basis." It applies to real estate, stocks, and most other capital assets received through inheritance.

Why this matters: capital gains are calculated as sale price minus basis. With step-up, your basis is the date-of-death value, not what your relative originally paid.

An example

Mom bought a house in El Cajon in 1972 for $32,000. She lived there until she passed away in early 2026, when the home's fair market value was $720,000. You inherit the home.

• Without step-up: if you sold for $725,000, your gain would be $725,000 - $32,000 = $693,000. Massive tax bill.
• With step-up: your basis is $720,000 (the FMV at her date of death). If you sell for $725,000, your gain is $5,000. At a typical 15-20% federal long-term capital gains rate plus California's 9.3% state rate, that's about $1,500 in total tax.

The step-up effectively erases decades of appreciation from your tax bill. This is why many heirs sell inherited houses relatively quickly: the longer you hold, the more new appreciation accumulates, and that new appreciation IS taxable.

How to establish the date-of-death value

The IRS will accept the value you reasonably establish, but you need documentation. Options:

• Probate appraisal: if the estate goes through probate, the court-appointed probate referee provides a formal appraisal, which is the gold standard for IRS purposes.
• Independent appraiser: $500–$700 in California for a single-family residential appraisal. Highly recommended even if no probate is required (for example, in a trust transfer).
• Comparative market analysis (CMA) from a real estate agent: free, but less rigorous than an appraisal. Acceptable for smaller estates but riskier for larger ones.
• Avoid: just pulling Zillow's Zestimate. The IRS may not accept it if audited.

Get this documentation soon after the date of death — values change, and reconstructing the FMV three years later is much harder than capturing it at the time.

How long-term vs. short-term capital gains works

Inherited property is automatically treated as long-term capital gain regardless of how long you hold it after inheriting. So even if you inherit and sell two months later, the gain qualifies for long-term rates (lower than ordinary income).

2026 federal long-term capital gains rates

• 0%: taxable income up to ~$48,350 (single) / ~$96,700 (married filing jointly).
• 15%: most middle-income earners.
• 20%: taxable income above ~$533,400 (single) / ~$600,050 (married filing jointly).
• +3.8% Net Investment Income Tax (NIIT) if your modified AGI is above $200k (single) / $250k (married filing jointly).

California state capital gains

California taxes capital gains as ordinary income — there's no preferential rate. Top California rate is 13.3%; most heirs land in the 9.3% bracket. There's no state-level long-term/short-term distinction.

Combined federal + state rate for most middle-income heirs: ~24-25% on whatever gain exists above the stepped-up basis.

Proposition 19: what changed about property taxes

Capital gains is a federal/state income tax issue. Property tax is a different beast — and California's Proposition 19 (effective February 16, 2021) dramatically changed it for inherited homes.

Before Prop 19

Under the old rules (Prop 58/193), parents could transfer their low Prop 13 property tax base to children for any property — primary, vacation, rental. The child kept the parent's assessed value and paid roughly the same property tax.

After Prop 19

Prop 19 narrowed this dramatically. The parent-to-child property tax exclusion now applies only if:

1. The property was the parent's primary residence;
2. The child takes it as their primary residence within one year; AND
3. The fair market value at the date of death is no more than the parent's assessed value plus $1 million.

If you don't move into the inherited property within a year, or if the FMV exceeds the parent's assessed value plus $1M, the property is reassessed at current market value, and the property tax bill recalculates accordingly.

What this means in practice

For most SoCal heirs who don't plan to live in the inherited home:

• The property will be reassessed at FMV.
• Property tax will jump from whatever the parent was paying (often $2,000-$4,000/year for a long-held property) to roughly 1.0–1.25% of FMV (often $7,000–$15,000/year for a SoCal home).
• Holding the property long-term becomes much more expensive.

This is one of the major reasons heirs sell inherited houses promptly: keeping a property you don't live in now costs significantly more in property tax than it did before Prop 19.

The primary residence exclusion (if you're moving in)

Different rule, but worth knowing: if you (the heir) live in the inherited home as your primary residence for at least 2 of the last 5 years before selling, you can exclude up to $250,000 of gain (single) / $500,000 (married filing jointly) from federal capital gains tax under IRC §121.

Because of the stepped-up basis, the gain on a recently inherited home is usually small anyway. But if you hold the home for years before selling and it appreciates significantly, the §121 exclusion can wipe out a meaningful tax bill — assuming you've made it your primary residence.

Sale costs that reduce your gain

Capital gain isn't just sale price minus basis — selling costs reduce the taxable amount. These include:

• Real estate agent commissions.
• Title insurance, escrow fees, transfer taxes paid by seller.
• Improvements made between inheriting and selling (roof replacement, HVAC, etc. — keep receipts).
• Repairs are generally NOT deductible against gain (only capital improvements). Talk to a CPA about classification.

For an inherited home sold quickly, these often eliminate any small gain that exists above the stepped-up basis. Many heirs end up with a small loss on paper after selling costs, which can be used to offset other gains.

The cash sale specifically

If you're considering a cash sale to an investor instead of listing, the tax math is the same — gain or loss is calculated based on net sale proceeds (after costs) minus basis. There's no special tax treatment for cash sales versus listings. What changes is the timing: cash sales close faster, so you realize the gain (or loss) sooner.

If you're selling in a year where you have other capital losses to offset, that's a good year to realize gains. If you're selling in a year where you're already in a high tax bracket, talk to a CPA about whether deferring to next tax year (by closing in early January vs. late December) makes sense.

Common mistakes that cost real money

• Not getting the date-of-death value documented. Without it, the IRS can challenge your basis years later and you'll have nothing to show.
• Renting the property briefly before selling, then claiming primary residence exclusion. Doesn't work — IRC §121 requires you to actually use it as primary residence.
• Forgetting Prop 19 reassessment will hit. If you don't move in within one year, expect a major property tax increase. Plan for it before you decide to hold.
• Mishandling depreciation if the parent was renting it out. Depreciation taken during the deceased's ownership doesn't carry over to you with a step-up — but if you continue to rent it after inheriting, you start your own depreciation schedule from the new (stepped-up) basis.
• Not coordinating with siblings or co-heirs. If multiple heirs inherit jointly, each gets a stepped-up basis on their share. Selling at different times among co-heirs gets complicated. Keep everyone aligned.

Bottom line for most SoCal heirs

If your situation is the most common one — you inherited a SoCal home that you don't plan to live in, the date-of-death value is similar to the current sale price, and you're selling within a year or two — your federal and state capital gains tax bill is likely small to zero. The bigger financial issue is Prop 19 property tax reassessment if you hold the property long.

For most heirs who don't want to live in the inherited home, selling within the first year (before a full year of post-Prop-19 property taxes hits) is the financially clean path. The stepped-up basis means you're not punished for selling fast.