- Inherited property gets a stepped-up cost basis, the value the IRS uses to measure your profit, equal to its value on the date of death. You owe capital gains tax only on appreciation, the growth in the home’s value, after that date.
- If you sell soon, the gain is usually small or zero. Hold for years and appreciation becomes taxable.
- Inherited property always counts as long-term (held more than a year): federal rates are 0%, 15%, or 20%, plus California’s 1% to 13.3%.
- Get a formal appraisal dated near the date of death, and report the sale even if you owe nothing.
If you inherited a house in California and plan to sell it, your capital gains tax, the tax on the profit when you sell, is probably smaller than you expect. The “step-up in basis” resets what the IRS treats as your purchase price to the home’s value on the date the owner died, which wipes decades of appreciation out of the calculation.
Capital gains tax on inherited property in California comes down to how the step-up works, how long you wait to sell, and which rates apply. This guide covers all three, plus documentation and ways to reduce the gain.
The Step-Up in Basis Explained
The step-up in basis is a federal tax rule that resets the cost basis of inherited property to its fair market value (what a willing buyer will pay) on the date of death. Cost basis is the starting value the IRS uses to measure your profit when you sell, normally what the owner paid plus improvements. When you inherit property, the IRS allows the step-up, and because gain is the sale price minus the basis, a higher basis shrinks the gain.
How Step-Up Basis Works
Let’s say your parents purchased a Los Angeles home in 1980 for $100,000. At their death in 2025, the home is worth $1,200,000. When you inherit the property:
- Your parents’ original basis: $100,000
- Your new “stepped-up” cost basis: $1,200,000
- Potential capital gain elimination: $1,100,000
If you sell the inherited house shortly after inheriting it for $1,200,000, you owe zero capital gains tax because your cost basis equals the sale price. The step-up wipes out $1,100,000 of taxable gain in this example, an enormous tax advantage.
One thing to remember: Always get the value in writing. Your stepped-up basis is only as strong as your proof. If the executor files a federal estate tax return, the value reported there generally becomes your basis.
If the estate doesn’t file one, order a formal appraisal from a licensed appraiser, dated near the date of death, and keep it with your tax records. A licensed appraiser can still value the home as of the date of death if you didn’t get one right away.
An agent’s comparative market analysis (a price opinion based on recent nearby sales) or a Zillow estimate is not an appraisal and carries less weight if the IRS asks you to support your number.
Do You Have to Report a Sale With Zero Gain?
Yes, you report the sale of an inherited house to the IRS even when the stepped-up basis leaves you with no capital gains tax. The escrow or title company generally files Form 1099-S with the IRS, which reports the sale price, so the IRS expects to see the sale on your return. You report it on Form 8949 and Schedule D, the forms for listing sales and totaling capital gains and losses.
Keep your appraisal and your settlement statement with your tax records, and ask a CPA to complete the forms if you’re unsure.
When You’ll Pay Capital Gains on Inherited Property
Capital gains tax on an inherited house applies only to appreciation that occurs after you inherit it. Take a home worth $1,200,000 on the date of death, which becomes its stepped-up basis, and consider two outcomes:
Scenario 1: Selling Shortly After Inheritance
- Inherited value (stepped-up basis): $1,200,000
- Sale price six months later: $1,220,000
- Capital gain subject to tax: $20,000
- Selling costs (commissions, fees): $75,000
- Net capital gain: -$55,000 (no tax owed, actually a loss)
Scenario 2: Keeping Property for Several Years
- Inherited value (stepped-up basis): $1,200,000
- Sale price five years later: $1,450,000
- Capital gain subject to tax: $250,000
- Selling costs: $90,000
- Net capital gain: $160,000
Selling costs come off your gain, which is why Scenario 1 ends in a loss instead of a $20,000 gain. In Scenario 2, you’d owe capital gains tax on $160,000. The rate depends on your income level and filing status.
What Capital Gains Tax Rates Should You Expect on Inherited Property?
Most heirs pay federal long-term capital gains tax of 0%, 15%, or 20%, plus California income tax of 1% to 13.3%, on the gain from selling inherited property.
Federal Rates
Long-term capital gains, meaning gains on property you owned for more than a year, are taxed at lower rates than short-term gains. Inherited property always qualifies for long-term capital gains treatment, no matter how long you owned it, so the short-term rules don’t apply. The long-term rates for gains you realize in 2026, per IRS Revenue Procedure 2025-32, are:
- 0% for taxable income up to $49,450 (single) or $98,900 (married filing jointly)
- 15% up to $545,500 (single) or $613,700 (married filing jointly)
- 20% above those thresholds
These thresholds apply to your total taxable income for the year, including the gain. Other filing statuses, such as head of household, have different thresholds, and the brackets adjust every year.
Higher earners may also owe the 3.8% net investment income tax once their modified adjusted gross income (for most people, the same as the adjusted gross income on their tax return) passes $200,000 (single) or $250,000 (married filing jointly).
California State Rates
California gives capital gains no preferential treatment and taxes them as ordinary income, at 1% to 13.3% depending on your total income. The top rate includes a 1% surcharge on income over $1 million. California taxes non-residents on income from California sources, including gains from California real property, so you may owe tax even if you live in another state.
How to Avoid or Minimize Capital Gains Tax on Inherited Property
You can reduce capital gains tax on an inherited house by selling soon, because the stepped-up basis leaves little appreciation to tax, but you can use other strategies to further reduce your gain.
Strategy 1: Move Into the Property
The Section 121 exclusion lets you exclude up to $250,000 (single) or $500,000 (married filing jointly) of gain when you sell your main home. To qualify, you must own the house and live in it as your main home for at least two years, not necessarily in a row, during the five years before you sell. This strategy only works if you want to live there.
Strategy 2: Make Capital Improvements
Money you invest in improvements after you inherit adds to your cost basis and reduces your gain. Improvements add value or extend the home’s life, like an addition or a new roof. Routine maintenance and repairs, like fixing a leak, don’t count.
Strategy 3: Keep Detailed Records of Selling Expenses
Selling expenses, such as real estate commissions, advertising, legal fees, title and escrow fees, and transfer taxes, reduce your gain because your gain is the sale price minus those costs and your basis. Keep meticulous records, and ask your CPA whether costs like pre-sale repairs qualify.
Strategy 4: Consider a 1031 Exchange
A 1031 exchange, named for Section 1031 of the tax code, lets you defer capital gains tax if you plan to reinvest the proceeds in other real estate. It requires strict adherence to IRS rules and deadlines and is only available if both the inherited property and the replacement property are held for investment or business use, not as personal residences.
Special Consideration: Inheriting Property in a Trust
Inherited property held in a trust may be taxed differently, depending on whether it’s a revocable or irrevocable trust (a revocable trust can be changed by its creator; an irrevocable one generally can’t) and when the trust was established. California also has specific property tax rules for trust property under Proposition 19, the 2020 ballot measure that changed how inherited homes are reassessed.
Generally, property held in a revocable trust still receives the step-up in basis upon the death of the grantor, the person who created the trust. However, consult with a tax professional about your specific situation, as trust taxation can be complex.
Selling an Inherited House at a Loss
Selling an inherited house at a loss means selling for less than its stepped-up basis, the home’s value on the date of death. Unfortunately, that loss isn’t tax-deductible if you or your family used the house as a home. Selling costs can also turn a small gain into a loss, and the same deductibility rule applies.
If no one used the house personally and the estate or heirs treated it as an investment, such as by renting it out, you can often claim a capital loss. Capital losses first offset capital gains, then up to $3,000 of other income per year. Converting it to a rental before selling may make a loss deductible, but professional tax advice is essential.
The Hidden Costs of Keeping a Vacant Inherited House
A vacant inherited house in California carries costs that never appear in a capital gains calculation, and they build the longer you wait to sell:
- Insurance. Most standard homeowners policies limit or end coverage once a house has been empty for 30 to 60 days, so heirs generally need a vacant home policy or endorsement. The Insurance Information Institute says an insurer may charge 50% to 60% more for one. Call the insurer as soon as the owner dies.
- Property tax. Under Proposition 19, California resets an inherited home’s property tax to market value as of the date of death unless an heir qualifies for an exclusion by moving in. At the 1% statewide rate the Board of Equalization uses, a home reassessed at $1,200,000 carries about $12,000 a year, or about $60,000 over five years.
- Utilities, HOA dues, and landscaping. These bills continue whether or not anyone lives in the house.
- Maintenance and security. Someone has to check the house regularly for leaks, break-ins, and pests, and collect the mail so the house doesn’t look vacant. Heirs who live out of state usually pay a property manager, house sitter, or local contractor, and the cost depends on the service and the property.
- City enforcement. The City of Los Angeles can order the owner of a vacant, unsecured building to secure it and, if the owner doesn’t, recover the cost through a lien. Other California cities have their own vacant property rules.
- Squatters. Adverse possession requires five continuous years of occupation and payment of all property taxes under Code of Civil Procedure section 325, so a successful claim is difficult. Removing someone who moves in still generally requires formal notice and an unlawful detainer court case.
What This Means for Your Sale
For most heirs, the step-up in basis, which resets an inherited home’s cost basis to its date-of-death value, means the tax hit is smaller than they’d assume. Handling the tax correctly takes careful documentation, smart timing, and accurate reporting.
If you’re working out what an inherited Los Angeles house might net after taxes, Martin Feinberg is happy to talk through your numbers, with no pressure to list. Contact Martin Feinberg to get started.
Please text 310.729.6573 or email martin@martinfeinberg.com directly for immediate attention.
This is a general explainer, not tax or legal advice. A CPA or tax attorney can run your numbers.