Capital Gains Tax on an Inherited House in California

Many families assume that selling a parent’s house, bought decades ago for a fraction of today’s value, will bring a huge tax bill. Usually it doesn’t, because of a rule called the step-up in basis. This guide explains how the gain on an inherited house is figured, how California taxes it, what changes for married couples and where Proposition 19 fits in. Every situation is different, so treat it as background for a conversation with a CPA.

The step-up in basis

A capital gain is, roughly, what you sell something for minus your “basis,” which for most purchases is what was paid for it. Inherited property is different. Under federal law, its basis is generally its fair market value on the date of the owner’s death (Internal Revenue Code §1014). If the estate elects the alternate valuation date allowed for estate tax purposes, the value on that date is used instead (IRS Publication 551).

So decades of appreciation before the death aren’t subject to capital gains tax. What counts is the change in value after the death, and selling costs such as commissions reduce the gain.

Here’s an example. Parents bought a house in 1980 for $90,000. When the surviving parent dies, it’s worth $950,000. A year later, the heirs sell it for $1,000,000 and pay $35,000 in commissions and other selling costs. Their gain is figured from $950,000, not $90,000:

Item	Amount
Sale price	$1,000,000
Minus selling costs	$35,000
Amount realized	$965,000
Minus stepped-up basis	$950,000
Taxable gain	$15,000

A date-of-death appraisal makes that value easier to document. In a probate, the probate referee’s appraisal records it; our guide to selling a house in probate explains that step.

Both halves of community property

California is a community property state, and that brings a second benefit for married couples. When one spouse dies, the couple’s community property as a whole, including the surviving spouse’s half, generally takes a new basis equal to its fair market value (IRS Publication 551). If a couple bought a house for $200,000 and it’s worth $1.2 million when one spouse dies, the survivor’s basis in the whole house becomes $1.2 million. When the surviving spouse later dies, the heirs get another step-up.

How title was held matters. When a married couple holds title as joint tenants, IRS rules treat it as a “qualified joint interest”: half the value is included in the estate of the spouse who died, and the survivor’s half keeps its original cost basis. Whether a California couple’s joint-tenancy home can still be treated as community property is a question for a CPA or estate attorney.

A surviving spouse who sells may also be able to use the home sale exclusion. If they haven’t remarried and sell within two years of the death, they may be able to exclude up to $500,000 of gain, as long as the other requirements are met (IRS Publication 523).

How the gain is taxed

Inherited property is automatically treated as held long term, even if it’s sold within a year of the death (Internal Revenue Code §1223). Federally, long-term gains are taxed at 0%, 15% or 20%, depending on taxable income (IRS Topic 409). Higher-income sellers may also owe the 3.8% net investment income tax, which applies above $200,000 of modified adjusted gross income for single filers and $250,000 for married couples filing jointly (IRS Topic 559).

California is different. It has no lower rate for capital gains; they’re taxed as ordinary income (Franchise Tax Board). California does generally follow the federal basis rules, including the step-up (Revenue and Taxation Code §18031).

If the estate or trust sells the house before distributing it, the sale goes on the estate’s or trust’s income tax return (Form 1041), and who ends up paying tax on any gain depends on distributions. A CPA who prepares estate and trust returns can sort that out.

If the house sells for less than its stepped-up value, whether the loss is deductible depends on how the house was used after the death. Losses on personal-use property, such as your own home, aren’t deductible (IRS Topic 409).

Withholding at closing

On many California real estate sales, 3⅓% of the sale price has to be withheld at closing and sent to the Franchise Tax Board as a prepayment of income tax (Revenue and Taxation Code §18662). Some sales are exempt, and the seller claims the exemption on Form 593: for example, when the price is $100,000 or less, when the house qualifies as the seller’s principal residence under the federal home sale rules (or the decedent’s, when an estate or trust sells) or when the sale produces a loss or zero gain for California tax purposes. With a stepped-up basis, a sale soon after a death can qualify for that last exemption.

Estate tax: usually not an issue

The federal estate tax reaches only large estates. For deaths in 2026, the basic exclusion is $15 million (IRS). California doesn’t have an inheritance tax, and it hasn’t required an estate tax return for deaths after 2004 (State Controller’s Office).

Prop 19: the property tax side

Capital gains tax is a one-time income tax on a sale. Proposition 19 is about property tax, but it can change whether keeping an inherited house makes financial sense.

Under Prop 19, a child who inherits a parent’s home keeps the parent’s lower taxable value only if the home becomes the child’s principal residence and the child files for the homeowners’ exemption within one year. Even then, if the home’s market value is more than the parent’s taxable value plus $1,044,586 (the figure for transfers from February 16, 2025, through February 15, 2027), the difference is added to the taxable value. If no child moves in, the house is reassessed at market value (Board of Equalization).

So keeping an inherited house as a rental or second home can bring a much bigger property tax bill than the family is used to, while selling soon after the death often means little capital gains tax. Our inherited house page covers selling one as-is.

When the step-up doesn’t apply

Not every house a family ends up with counts as inherited for tax purposes. If a parent gave the house, or a share of it, to a child during life, for example by adding the child to the deed, the child’s basis in what they received is generally the parent’s old basis, not the value at death (IRS Publication 551). Certain irrevocable trusts can lead to the same result; see selling a house in an irrevocable trust. Because these cases can mean a much larger taxable gain, it’s worth having a CPA review how the house was held before setting a price.

A number to plan around

A tax estimate starts with a realistic sale price. If a quick, as-is sale is one of the options, EZ Home Offer can provide a written cash offer, usually within 24 hours, with no fees or commissions charged to the seller. A cash offer is usually below full market value, so it’s worth comparing it with what an agent expects the house to bring.

Sources

General information about California rules as of October 3, 2026, not legal, tax or financial advice. Laws change and every situation is different, so check the details with an attorney, CPA or other professional.