Capital Gains Tax on Inherited Property in California: A 2026 Guide

By Andrea Pazmino-Pace, REALTOR® | HomeSmart Realty Group
Updated August 2026

Quick Answer

You do not normally pay capital gains tax simply because you inherit a property in California. Capital gains tax may apply when you sell the inherited property for more than its adjusted tax basis.

For most inherited properties, the starting tax basis is the property’s fair market value on the date of the previous owner’s death. This is commonly called a step-up in basis. As a result, the taxable gain may be much smaller than the total increase in value during the previous owner’s lifetime.

How Is Capital Gains Tax Calculated on Inherited Property?

The basic calculation is:

Sale price − selling expenses − adjusted basis = capital gain or loss

The adjusted basis may include:

• Fair market value on the date of death

• Qualifying improvements completed after inheritance

• Certain acquisition or estate expenses

• Adjustments for depreciation if the property was rented

• Other tax-basis adjustments

The IRS states that the basis of inherited property is generally its fair market value on the date of death. If the property sells for more than its adjusted basis, the difference may be taxable. IRS guidance on inherited property

What Is a Step-Up in Basis?

A step-up in basis generally changes the property’s basis from what the deceased owner originally paid to its fair market value on the date of death.

Example

Assume a parent purchased an East Los Angeles home for $150,000 many years ago. The property was worth $700,000 when the parent died.

The heir’s initial basis would generally be approximately $700,000, not $150,000.

If the heir later sells the property for $760,000 and pays $45,000 in qualifying selling expenses, the preliminary calculation would be:

• Sale price: $760,000

• Selling expenses: $45,000

• Amount realized: $715,000

• Date-of-death basis: $700,000

• Estimated gain before other adjustments: $15,000

The heir would not normally calculate the gain from the parent’s original $150,000 purchase price.

Every situation is different. Obtain advice from a CPA, enrolled agent or qualified tax attorney before relying on an estimate.

Why Is a Date-of-Death Appraisal Important?

A retrospective date-of-death appraisal establishes the property’s fair market value as of the date the owner died.

This appraisal may become important when:

• The property is sold

• The estate files a tax return

• Multiple heirs divide the proceeds

• The IRS asks for support for the reported basis

• The property was inherited several years before the sale

• Major improvements were completed after inheritance

A current market analysis is useful for deciding how to price the home today, but it is not the same as a qualified retrospective appraisal prepared for tax purposes.

When Does Capital Gains Tax Apply?

Capital gains tax may apply when the net sale proceeds exceed the adjusted basis.

The amount depends on:

• Date-of-death value

• Final selling price

• Selling expenses

• Capital improvements

• Rental depreciation

• Ownership percentages

• Federal taxable income

• California taxable income

• Whether an estate, trust or beneficiary sells the property

• Eligibility for another tax provision

The gross check received at closing is not automatically the taxable gain.

Are Inherited Properties Treated as Long-Term Assets?

Generally, yes. The IRS normally treats inherited property as having been held for more than one year, regardless of how soon the beneficiary sells it. Therefore, a taxable gain is generally treated as a long-term capital gain for federal purposes. IRS Publication 544

Federal long-term capital gains are commonly taxed at 0%, 15% or 20%, depending on taxable income and filing status. Some higher-income taxpayers may also owe the 3.8% Net Investment Income Tax.

How Does California Tax the Gain?

California does not provide a separate lower tax rate for long-term capital gains. The state taxes capital gains as ordinary income.

The applicable California tax depends on the taxpayer’s total taxable income and filing situation. California Franchise Tax Board

This means the federal and California tax calculations can be different.

Can You Avoid Capital Gains Tax by Selling Immediately?

Selling soon after the inheritance may reduce the possibility of a large taxable gain because the selling price may remain close to the date-of-death value.

It does not guarantee that no tax will be owed. The final calculation still depends on:

• Confirmed date-of-death value

• Selling price

• Selling expenses

• Improvements

• Depreciation

• Other basis adjustments

The decision to sell should also consider the home’s condition, carrying costs, family agreement and market conditions.

What Expenses Can Reduce the Taxable Gain?

Certain expenses may reduce the amount realized from the sale or increase the property’s adjusted basis.

Possible examples include:

• Real estate commissions

• Escrow and title charges attributable to the seller

• Transfer taxes

• Attorney fees directly related to the sale

• Capital improvements

• Certain settlement expenses

• Other qualifying selling costs

Routine maintenance usually does not receive the same tax treatment as a capital improvement.

Keep invoices, contracts, escrow statements, receipts and proof of payment. Your tax professional should determine which expenses qualify.

What Happens If the Property Was Rented?

Rental use can make the calculation more complicated.

Issues may include:

• Depreciation deductions

• Depreciation recapture

• Rental income and expenses

• Repairs versus capital improvements

• Suspended passive losses

• Division between personal and rental use

• Sale by an estate, trust or beneficiary

If the inherited home was rented before or after the inheritance, obtain tax advice before selling.

Can the Home-Sale Exclusion Apply?

A beneficiary does not automatically receive the federal home-sale exclusion merely because the inherited property was the deceased owner’s residence.

However, an heir who later owns and occupies the home as a principal residence may qualify after satisfying the ownership and use requirements.

The general federal rule requires the seller to have owned and lived in the property as a principal residence for at least two years during the five-year period ending on the sale date.

A qualifying seller may exclude up to:

• $250,000 of gain for an individual

• $500,000 for certain married couples filing jointly

Additional restrictions apply. IRS home-sale guidance

Can a 1031 Exchange Defer the Gain?

A Section 1031 exchange may be considered when an inherited property is held for investment or productive use in a business and is exchanged for qualifying investment real estate.

A house held solely for personal use does not qualify simply because it was inherited.

A 1031 exchange has strict property identification, timing and intermediary requirements. Speak with a tax professional and qualified intermediary before selling or accepting sale proceeds.

Does Proposition 19 Eliminate Capital Gains Tax?

No. Proposition 19 concerns California property-tax reassessment. It does not determine the federal or California income-tax basis used to calculate capital gain.

Under Proposition 19, a qualifying family home may receive limited protection from property-tax reassessment when transferred from a parent to a child. The receiving child generally must use the home as a principal residence and file the required claims.

Capital gains tax and property tax are separate issues.

What If Several Siblings Inherit the Property?

When siblings inherit a property together, they should determine:

• Each beneficiary’s ownership percentage

• Who has authority to sell

• Whether probate or trust administration is required

• The date-of-death value

• How expenses will be divided

• Whether one sibling wants to buy out the others

• How net proceeds will be distributed

• Who will report the sale

A beneficiary who receives 50% of the property generally receives 50% of the applicable basis and reports the beneficiary’s share of the sale.

Written agreements and professional advice can reduce disagreements.

Is Inherited Money Taxable Income?

Receiving inherited property is generally not treated as ordinary income to the beneficiary. Selling the property is a separate taxable transaction.

The sale may need to be reported using IRS Form 8949 and Schedule D. Depending on who holds title at the time of sale, reporting may occur on an individual, estate or trust return.

Documents to Gather Before Selling

Collect these documents early:

• Death certificate

• Trust or will

• Probate orders

• Deed and title documents

• Date-of-death appraisal

• Schedule A of Form 8971, if provided

• Property-tax records

• Mortgage and lien information

• Improvement receipts

• Rental and depreciation records

• Insurance documents

• Final settlement statement

• Beneficiary ownership information

Do not wait until tax season to begin locating these records.

Frequently Asked Questions

Do I pay tax based on what my parents originally paid?

Usually not. The basis of inherited property is generally its fair market value on the date of death, subject to exceptions and adjustments.

Do I owe capital gains tax if I sell for the date-of-death value?

There may be little or no gain if the net amount realized is close to the adjusted basis. A tax professional should complete the calculation.

Can a Zillow estimate establish the date-of-death value?

An online estimate is generally not a substitute for a qualified retrospective appraisal when reliable tax documentation is needed.

Is Proposition 19 the same as the step-up in basis?

No. Proposition 19 concerns property-tax reassessment. Step-up in basis concerns the income-tax calculation when inherited property is sold.

Can siblings deduct repair expenses?

Some expenses may affect basis or sale proceeds, while routine repairs may receive different treatment. Keep complete records and ask a tax professional.

Who pays the tax when a trust sells the property?

It depends on the trust, distributions, title and timing. The trust, estate or beneficiaries may have reporting responsibilities.

Final Answer

Capital gains tax on inherited property in California is generally calculated using the difference between the net selling price and the property’s adjusted date-of-death basis.

Obtaining a qualified date-of-death appraisal, keeping improvement and selling records, and consulting a tax professional before the sale can help heirs understand their potential tax responsibility.

Are You Preparing to Sell an Inherited Property?

I help families in East Los Angeles and throughout Los Angeles County prepare inherited homes for sale, review local market conditions and create a selling strategy based on the property’s condition and ownership situation.

Andrea Pazmino-Pace, REALTOR®
HomeSmart Realty Group
Phone: (626) 590-1289
Website: AskAndreaHomes.com

This article provides general information and is not legal, tax, probate or accounting advice. Consult a qualified professional regarding your circumstances.

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