I get these questions from probate and trust estate clients often when wondering about their tax liability when selling a home: Will I have to pay capital gains tax if I sell an inherited home in California?  What is a stepped-up basis and how does it affect taxes when selling an inherited house? How is the value of an inherited home determined for tax purposes? Do I owe taxes if I sell an inherited home right away vs waiting? Are there different tax implications if an inherited home is in a trust estate vs probate in California?

Inheriting a home can come with a lot of emotions and a lot of questions, especially as you try to piece together the puzzle of someone's financial affairs. One of the most common questions I tend to get asked when people inherit property in greater Sacramento relates to the tax implications of selling and if they will owe capital gains tax on the sale. The good news is that in many cases, selling an inherited home in California may result in less tax than people expect because of something called a stepped-up basis.

When someone inherits a home or become the administrator of a probate or trust estate, the tax basis of the property typically adjusts to the fair market value at the date of the original owner’s death. This means that if the home was purchased decades ago for a much lower price, the heir does not inherit that original purchase price for tax purposes. Instead, the basis is “stepped up” to the value at the time of inheritance. (Side note: you may need a "date of death appraisal" to establish the value. Also, if the home had more than one owner, there may be some complexity in establishing the tax basis)

For example, suppose there is a Carmichael home that was originally purchased in the 1970s for $80,000 and is worth $650,000 when the owner passes away. If the heirs later sell the home for around $650,000, there may be little to no capital gains tax owed, because the sale price is close to the stepped-up value. Of course, every situation is different.

If significant time passes between inheriting the property and selling it and the home increases in value during that time, then capital gains could apply to the increase that occurs after inheritance or date of death. In addition, heirs should also consider property tax issues, especially if the property is kept as a rental or transferred between family members under California’s property tax rules.

Another important factor is how title to the property was held. Many Sacramento homes pass through living trusts, which often allows families to sell the property without going through probate. Others may require a probate process before the home can be sold. The tax implications can vary depending on the structure of the estate and how the sale is handled.

Because tax rules can be complex, I always advise you speak with a CPA or other qualified tax professional before selling an inherited home. They can review the estate details, establish the correct stepped-up basis, and help ensure everything is reported properly to the IRS and the California Franchise Tax Board.

If you’ve inherited a home and and are trying to decide what to do next, you’re not alone. Many families find themselves balancing legal, financial, and emotional considerations all at once. Having a clear understanding of the tax side of the transaction is one of the first steps toward making the right decision for your situation. I welcome your call to talk through different scenarios to the extent I can be helpful and connect you with an attorney or CPA to assist you.

I welcome your call to see if we are a fit to work together.

Contact Erin Stumpf at Coldwell Banker Realty (DRE#01706589) with questions today: call/text 916-342-1372 or email to erin@erinstumpf.com