One of the most significant advantages of inheriting property is the “step-up in basis” for capital gains tax purposes. Understanding how this works can save you tens of thousands of dollars.
The Step-Up in Basis Explained
When you inherit property, the IRS allows a “step-up” in the cost basis to the fair market value at the date of death. This is one of the most valuable tax benefits in the U.S. tax code.
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 cost basis: $100,000
- Your new “stepped-up” cost basis: $1,200,000
- Potential capital gain eliminated: $1,100,000
If you sell the inherited house shortly after inheritance for $1,200,000, you owe zero capital gains tax because your cost basis equals the sale price. This is an enormous tax advantage. However, there is a small caveat to keep in mind. If the executor/estate uses an alternate valuation date or there is an estate tax return with a formal appraisal, the “fair market value” is typically that reported value.
When You’ll Pay Capital Gains on Inherited Property
You only pay capital gains tax on appreciation that occurs after you inherit the property. Here’s how it works:
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, repairs): $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
In Scenario 2, you’d owe capital gains tax on $160,000. The rate depends on your income level and how long you held the property.
Federal Capital Gains Tax Rates on Inherited Property
Long-term capital gains rates (property held over one year):
- Approximately 0% for taxable income up to $49,450 (single) or $98,900 (married filing jointly)
- Approximately 15% for income between those thresholds and $545,500 (single) or $613,700 (married)
- Approximately 20% for income above those thresholds
Of course, you should check the actual long‑term capital gains tax brackets whenever you intend to file your taxes. Also, check with a tax professional for the best and most current advice.
Short-term capital gains rates (property held one year or less):
- Taxed as ordinary income at your marginal tax rate (10% to 37%)
The key insight: If you’re going to sell an inherited California house, doing so sooner rather than later minimizes potential capital gains tax exposure. Every year you hold the property, you’re at risk of owing taxes on appreciation.
California State Capital Gains Tax
California doesn’t provide preferential treatment for capital gains. The state taxes capital gains as ordinary income, with rates ranging from 1% to 13.3% depending on your total income.
California taxes non‑residents on California‑source income, which includes gain from California real property. If you sell after moving, you still may owe California tax on the gain because the property is located in California—discuss your situation with a tax professional.
How to Avoid or Minimize Capital Gains Tax on Inherited Property
Strategy 1: Sell Quickly After Inheritance The stepped-up basis means selling soon after inheritance typically results in minimal or no capital gains. Property values may not appreciate significantly in six to twelve months, meaning your sale price stays close to your stepped-up basis. So, selling soon usually minimizes post‑inheritance appreciation.
Strategy 2: Move Into the Property If you move into the inherited house and establish it as your primary residence for at least two of the five years before selling, you can exclude up to $250,000 (single) or $500,000 (married filing jointly) of capital gains under the Section 121 exclusion. However, this strategy only makes sense if you actually want to live in the property.
Strategy 3: Make Capital Improvements Any money you invest in improving the property (not just maintaining it) adds to your cost basis, reducing potential capital gains. Major renovations, additions, or significant upgrades increase your basis and lower your tax exposure when you eventually sell. To reiterate: they must be improvements, not just routine maintenance.
Strategy 4: Keep Detailed Records of Selling Expenses Selling costs including real estate commissions, title insurance, attorney fees, transfer taxes, and repairs made specifically to prepare the property for sale can be deducted from your capital gain. Keep meticulous records of all expenses.
Strategy 5: Consider a 1031 Exchange If you plan to invest in other real estate, a 1031 exchange allows you to defer capital gains by reinvesting proceeds into a similar property. This is complex and requires strict adherence to IRS rules, but it can defer taxes indefinitely. This is only available if both the inherited property and the replacement property are held for investment or business use, not as personal residences. It will not apply if it is held as a personal residence.
Special Consideration: Inheriting Property in a Trust
If the property was held in a trust, the tax treatment may differ slightly based on whether it’s a revocable or irrevocable trust and when the trust was established. California also has specific rules about trusts and property taxes under Proposition 19.
Generally, property held in a revocable living trust still receives the step-up in basis upon the grantor’s death. However, consult with a tax professional about your specific situation, as trust taxation can be complex.
Selling an Inherited House at a Loss
In some situations, particularly in declining markets or when substantial repairs are needed, you might sell an inherited house for less than its stepped-up basis. Unfortunately, losses on the sale of inherited property used as a personal residence are not tax-deductible. To state this more clearly: Loss on personal‑use property (like a home you actually live in) is not deductible.
If you convert the inherited property to a rental before selling, losses may become deductible as investment property losses, subject to various limitations. In other words, If the property is not used personally and is treated as an investment property by the estate or beneficiaries, a loss can often be claimed as a capital loss (either on the estate’s return or on the beneficiary’s return if they sell after receiving it), subject to normal capital‑loss limits. So again, professional tax advice is essential for this strategy.
The Hidden Costs of Keeping a Vacant Inherited House
Many heirs initially decide to keep an inherited property, thinking they’ll deal with it later or hoping to use it occasionally. However, the costs of maintaining a vacant house often exceed expectations, particularly for absentee owners.
Vacant Home Insurance Challenges
Standard homeowners insurance typically doesn’t cover vacant properties. Most policies require the home to be “regularly occupied” and may cancel coverage or deny claims if they discover the property has been vacant for 30-60 days.
Vacant Home Insurance Is More Expensive
Below are reasonable market ranges for the Los Angeles area in early 2026, but they are not statutory. The exact amount will vary by carrier, coverage, neighborhood risk, etc.
- Standard homeowners policy: $1,500-$3,000 annually (Los Angeles area)
- Vacant home insurance: $3,000-$5,000+ annually (often 50-80% more expensive)
Why Vacant Home Insurance Costs More
Insurance companies view vacant properties as higher risk because:
- No one is present to notice and address problems quickly
- Vacant homes attract vandalism, theft, and squatters
- Frozen pipes, water leaks, and other issues cause more damage when undetected
- Fire risk increases in unoccupied properties
Coverage Limitations: Even with vacant home insurance, coverage may be limited. Some policies exclude certain types of damage or provide lower coverage limits than standard homeowners policies. Read the policy carefully to understand what’s protected.
The Insurance Gap Period: Many heirs don’t realize their coverage has lapsed until they file a claim. If the inherited house sits empty for months while you’re dealing with probate and making decisions, you may be completely uninsured without knowing it.
Vacant House Maintenance Requirements
Vacant properties deteriorate faster than occupied homes. Without regular human activity and attention, problems compound quickly.
Essential Maintenance Tasks for Vacant Properties
Weekly or Bi-Weekly:
- Check for break-ins, vandalism, or squatter activity
- Run all faucets and flush toilets to prevent pipe issues
- Check for water leaks or moisture problems
- Collect mail and packages (prevents “vacant property” signals)
- Inspect exterior for damage or unauthorized entry
- Maintain landscaping to avoid neighbor complaints and code violations
Monthly:
- Test HVAC system and adjust settings seasonally
- Inspect roof, gutters, and downspouts
- Check for pest infestations
- Test smoke detectors and security systems
- Review utility bills for unusual usage (indicating leaks or intrusion)
Quarterly:
- Deep clean to prevent mold, mildew, and pest issues
- Inspect foundation and exterior for damage
- Service HVAC systems
- Trim trees and shrubs
- Address any deferred maintenance issues
The Problem for Absentee Owners: If you live out of state, you’ll need to hire someone to handle these tasks. Property management companies, house-sitting services, or professional vacant property managers charge $100-$300 monthly for basic monitoring, plus additional costs for any actual maintenance or repairs.
Utilities and Ongoing Costs
Even vacant properties require utilities:
Electricity: $50-150/month (for HVAC, security systems, preventing mold)
Water/Sewer: $40-100/month (pipes must be used regularly)
Gas: $20-60/month (for water heater, heating)
Trash/Recycling: $30-60/month
HOA Fees: $200-800/month (if applicable)
Landscaping: $100-300/month
Property Management/Monitoring: $100-300/month
Monthly Total: $540-$1,670+ (not including property taxes, insurance, or repairs)
For a vacant inherited house in Los Angeles, you could easily spend $15,000-$30,000 annually just keeping the property maintained and protected. This doesn’t include the property taxes we discussed earlier, which could add another $12,000+ per year.
Legal and Liability Issues
Vacant properties create legal exposure for owners:
Attractive Nuisance: Vacant homes, especially with pools, can attract trespassers. If someone gets injured on your property, you could be held liable.
Code Violations: Many California municipalities have strict property maintenance codes. Unmowed lawns, peeling paint, or visible deterioration can result in fines, liens, or even legal action by the city.
Squatter Rights: California law provides certain protections to people who occupy property. If squatters move into your vacant house and you don’t discover them immediately, removing them can become a lengthy legal process. That said, California adverse possession requires five years of continuous, open, notorious, hostile, exclusive possession and payment of property taxes. So, while true adverse possession is difficult because squatters must usually pay property taxes for five years, even short‑term squatting can require a formal eviction process and create significant legal and security headaches.
Neighbor Complaints: Poorly maintained vacant properties affect neighborhood property values. Frustrated neighbors may file complaints with the city or HOA, triggering inspections and potential fines.
The Emotional and Time Burden
Beyond financial costs, maintaining a vacant inherited house from a distance creates significant stress:
- Coordinating with contractors, inspectors, and service providers across time zones
- Managing emergency repairs remotely when pipes burst or other problems arise
- Dealing with neighbor complaints, city violations, or security issues
- Making frequent trips to check on the property (time and travel costs)
- Constant worry about what might be going wrong while you’re not there
Many absentee heirs describe feeling “tethered” to the inherited property, unable to move forward with their lives while the empty house demands attention and resources.
Frequently Asked Questions
Do I have to pay capital gains tax if I sell an inherited house in California?
You only pay capital gains tax on appreciation that occurs after you inherit the property, thanks to the step-up in basis. If you sell shortly after inheritance, your capital gain is typically minimal or zero.
How is property tax calculated on an inherited house in California?
After Proposition 19 (2021), inherited properties are reassessed at current market value unless you inherit a primary residence and make it your own primary residence within one year with a $1+ million exclusion. The exclusion is actually the factored base year value plus $1,044,586 for transfers between February 16, 2025, and February 15, 2027. For most absentee heirs, property taxes increase substantially. That said, the rules could change. There are active attempts to repeal the inheritance portion of Prop 19.
Can I rent out an inherited house instead of selling it?
Yes, you can rent an inherited property. However, being a long-distance landlord in California comes with challenges including complex landlord-tenant laws, property management costs, and ongoing maintenance responsibilities.
What happens if I inherit a house with my siblings and we disagree about selling?
All heirs must agree to sell the property. If you can’t reach an agreement, partition actions in court can force a sale, though this is expensive and time-consuming. Mediation often helps resolve heir disputes.
Is vacant home insurance really necessary if I plan to sell soon?
Yes. Standard homeowners insurance typically doesn’t cover vacant properties. Without proper coverage, you’re personally liable for any damage or injuries that occur on the property. Vacant home insurance is essential until the property sells.
How long does it typically take to sell an inherited house in Los Angeles?
Market time varies by neighborhood, property condition, and pricing. As of 2024–2025, median days on market in the Los Angeles area have been roughly 30–40 days, with homes needing work often taking longer (90+ days).
Can I sell an inherited house during probate?
In some cases, yes. The executor can petition the probate court for authority to sell the property before probate closes. This requires court approval but can be done, especially when carrying costs are high or the estate needs liquidity.
What if the inherited property has a mortgage?
Outstanding mortgages must be paid off at closing. The mortgage payment comes out of sale proceeds before you receive anything. If the property is underwater (worth less than the mortgage), you may need to consider a short sale or discuss options with the lender.