Capital Gains on an Inherited House in California: Stepped-Up Basis Explained

"How much tax am I going to owe?"

This is usually the second question heirs ask, right after "how long does probate take?" The good news for most California families: the answer is probably very little, thanks to a federal tax provision called the stepped-up basis.

The short answer: Under IRC § 1014, an inherited home's cost basis resets to its fair market value on the date of death. Gain is measured only from that date forward, so selling within months of inheriting often leaves close to zero taxable gain. California has no state inheritance or estate tax, though appreciation after the date of death is taxable when you eventually sell. Confirm the details with a CPA.

Here's exactly how it works, with real numbers.

What "Capital Gains" Means

When you sell any property, capital gains tax is owed on the difference between:

• Sale price, minus
• Cost basis (what the property "cost" for tax purposes)

For property someone bought normally, the cost basis is what they paid plus the cost of improvements. For inherited property, the rules are completely different.

The Stepped-Up Basis (IRC § 1014)

Under federal law (Internal Revenue Code § 1014), inherited property gets a brand new cost basis equal to its fair market value on the date the previous owner died.

This is enormous in California, where homes have appreciated dramatically over decades.

Example: A San Jose Home

Your dad bought a San Jose home in 1978 for $95,000.

He passes away in 2026, when the home is appraised at $1,400,000.

You sell the home six months later for $1,420,000.

Without stepped-up basis	With stepped-up basis (actual law)
Gain: $1,420,000 − $95,000 = $1,325,000	Gain: $1,420,000 − $1,400,000 = $20,000
Federal + CA tax (33%): **$437,000**	Federal + CA tax (33%): **$6,600**

The stepped-up basis saved roughly $430,000 in tax on this single transaction. That's not a typo. That's the law.

Why It Works This Way

Congress wrote § 1014 to avoid taxing decades of appreciation when wealth passes to heirs. The theory: estate tax may already apply to large estates, so capital gains tax also kicking in would be double-taxation. For most California families whose estates fall well under the federal estate tax exemption (over $13 million per person in 2025), the result is that they pay almost no tax on appreciated real estate they inherit.

What Counts as "Fair Market Value at Death"?

You need to substantiate the stepped-up basis with documentation. The accepted methods are:

• Date-of-death appraisal by a licensed appraiser (the cleanest approach; ~$400–$700)
• Probate referee's valuation if the home went through California probate (the court-appointed referee's appraisal is generally accepted by the IRS)
• Comparable sales analysis prepared by a Realtor (less authoritative but sometimes used)
• Alternate valuation date (six months after death), only available for taxable estates and elected on Form 706

For most San Jose, Oakland, and Sacramento estates, the probate referee's number is what gets used. The California Courts probate self-help pages explain how the referee fits into the process.

What If You Wait Years to Sell?

The stepped-up basis is set on the date of death and never changes. But any appreciation after that date is taxable when you sell.

Example: Holding for Five Years

Same San Jose home, stepped-up basis of $1,400,000 in 2026.

You hold it as a rental until 2031 and sell for $1,750,000.

• Gain: $1,750,000 − $1,400,000 = $350,000
• Long-term capital gains rate (federal): typically 15% or 20%
• California treats it as ordinary income (up to 13.3%)
• Combined tax bill: roughly $95,000–$120,000

Inherited property is automatically treated as long-term for capital gains purposes regardless of how long you held it, that's a real benefit because long-term rates are much lower than short-term (which is taxed at ordinary income rates).

California-Specific Rules

A few things to know that are unique to California:

• No California inheritance tax. California does not impose a state inheritance tax or a state estate tax. (Some states do, California is not one of them.)
• Property tax is a separate issue. Whether you keep your parent's low Prop 13 property tax base after Proposition 19 is a different question from capital gains. Prop 19 generally requires the heir to make the home their primary residence within one year to retain (a portion of) the parent's tax base. If you're selling, this doesn't affect you.
• Documentary transfer tax at recording is a small one-time tax (about $1.10 per $1,000 in most counties; San Francisco and a few others are higher). Usually paid by the seller at closing.

What About Trusts?

If the home was in your parent's revocable living trust, you still get the stepped-up basis. Revocable trust assets are included in the grantor's gross estate for tax purposes, which is what triggers § 1014.

Irrevocable trusts are more complicated and depend on whether the trust was structured to keep the assets in the grantor's gross estate. If your inheritance came through an irrevocable trust, talk to a CPA before selling.

Selling Soon vs. Holding

The cleanest tax outcome is to sell within roughly a year of death. Why?

• The stepped-up basis is set at death
• Real estate doesn't usually move enough in 6–12 months to create meaningful taxable gain
• You avoid the cost and stress of holding (taxes, insurance, maintenance)
• Closing the estate is simpler with one fewer asset

This isn't tax advice for your specific situation, confirm with a CPA, but it's why so many California families choose to sell shortly after inheriting rather than turning the home into a rental.

We cover the wider picture in our inherited house guide, and discuss the broader tradeoffs in our Selling an Inherited House in San Jose guide and the family-dynamics piece in our heir-agreement guide.

Important Caveats

This article is general information, not tax advice. A few things that can change the analysis materially:

• The home was used as a rental and depreciation was taken
• The home was held in an irrevocable trust
• The home was gifted (rather than inherited), gifted property does not receive a stepped-up basis
• The estate exceeds the federal estate tax exemption
• Multiple heirs each take partial interests at different times

Warning: Gifted property is not inherited property. A home transferred to you while your parent was alive does not receive a stepped-up basis, so decades of appreciation stay taxable. If a deed was signed before death, raise it with a CPA before you sell.

For any of these, talk to a CPA who handles California estates before selling.

When You're Ready to Sell

If you've inherited a Northern California home and want a clean, fast sale that closes on the estate's timeline, with full documentation we can hand to your CPA for basis support, we're easy to talk to.

Call or text: (707) 202-5153 Or: request a written cash offer

We'll show you what a cash sale would look like, in writing, with no pressure to accept.