Capital Gains Tax on Inherited Property in California (2026)

How stepped-up basis actually works

When the original owner buys a house, the IRS records their "basis" — usually the purchase price plus capital improvements. When they sell, capital gains tax applies to the difference between sale price and basis.

Example: Your dad bought a Sacramento house in 1992 for $145,000. He added a kitchen remodel in 2008 ($30,000). His basis when he died was $175,000.

If he had sold in 2026 for $680,000 the day before he died, he'd owe capital gains tax on $505,000 of profit (minus the $250,000 single-filer exclusion, leaving $255,000 taxable). At federal long-term rates plus California state rates, the tax bill could exceed $80,000.

When he dies and you inherit the house, your basis "steps up" to the fair market value on the date of his death. If FMV at death was $680,000, your basis is $680,000.

If you sell the same house six months later for $680,000, your taxable gain is zero. No capital gains tax federal or state. You receive the full $680,000 (minus selling costs).

This is the single most valuable financial benefit of inheriting property. It can be worth $50,000-$200,000+ depending on how much the house appreciated during the deceased's ownership.

The misunderstanding about the "year window"

A lot of online articles claim you have to sell within a year of death to keep the stepped-up basis. This isn't quite right.

Your basis is fixed at the date-of-death FMV. It doesn't expire. What changes is the gain calculation if value moves after death.

If you inherit the house at $680,000 FMV and sell it three years later for $750,000, you owe capital gains tax on $70,000 of gain — the appreciation since the date of death. Not the entire gain since 1992. Just the post-death appreciation.

What people are loosely referring to is the IRS expectation that sales close to the date of death will be at or near the date-of-death valuation. If you inherit and sell quickly for substantially less than the appraised value, expect the IRS to ask why. Usually fine — answers like "needed major repairs" or "had to sell to settle estate" are accepted.

California state tax treatment

California conforms to the federal stepped-up basis rule. Same mechanics, same outcomes, generally.

What's different in California: state capital gains rates. California treats long-term capital gains as ordinary income, taxed at rates from 1% to 13.3% depending on your total income. There's no preferential capital gains rate at the state level.

For most heirs selling at or near date-of-death FMV, state tax is also zero (because there's no gain). For heirs selling years later with substantial appreciation, California state tax can be larger than federal in high-income brackets.

Multiple heirs splitting basis

If multiple siblings inherit a house equally, each sibling's basis is their proportional share of the date-of-death FMV.

Three siblings inherit a $600,000 house. Each has a $200,000 basis. If they sell together for $600,000, no taxable gain.

If one sibling buys out the other two, the buying sibling now has a basis equal to her original $200,000 plus what she paid the other two ($400,000) = $600,000 basis. Sold later, only post-buyout appreciation is taxable.

Document everything. Keep the appraisal. Keep records of who paid whom and when. Lost paperwork on inherited basis is one of the most common ways heirs accidentally trigger capital gains tax years later.

What if it was a rental property?

If the deceased used the property as a rental, things get more complex but mostly in your favor.

The basis still steps up to date-of-death FMV. There's no depreciation recapture for the heir on the deceased's prior depreciation — that resets at the step-up. This is genuinely good news for inheriting rentals.

Two paths after inheriting a rental:

1. Sell it. Use the stepped-up basis. Same as a primary residence.
2. Keep renting it. You start fresh on depreciation using the stepped-up basis as your new starting point. Future depreciation reduces your annual tax liability.

If you sell within a year, you can also do a 1031 exchange (like-kind exchange) to defer the gain into another rental property. Not relevant if you're trying to convert to cash, but worth knowing.

Common mistakes that cost real money

Not getting an appraisal at date of death. This is the biggest one. The IRS wants documentation of FMV. Zillow estimates aren't enough. Get a licensed real estate appraiser to do a date-of-death appraisal within 60-90 days of passing. Cost: $400-$700. The appraisal protects you in audit and locks in your stepped-up basis.

Selling for far less than FMV without documenting why. A sale at 75% of appraised value might trigger questions. Have a paper trail: cash sale due to property condition, due to multiple-heir conflict, or due to estate liquidity needs.

Forgetting California's separate state tax rules. Federal exclusions and rules don't always match California. Talk to a CA-licensed CPA, not just a federal tax preparer.

Mixing personal and estate funds. Pay sale-related expenses from the estate account, not your personal account, until probate is closed.

Selling before probate is settled. If the estate is in probate, you can't sell without court authority (Letters Testamentary). Talk to the estate attorney first.

Worked example (Sacramento, 2026)

Your mother dies in March 2026. She owned an Elk Grove house she bought in 1998 for $185,000. Date-of-death appraisal comes in at $620,000.

Scenario A: Sell to cash buyer 90 days after death for $510,000.

• Basis: $620,000
• Sale price: $510,000
• Capital loss: $110,000 (offsets other capital gains; $3,000/year against ordinary income)
• Tax owed on the sale: $0

Scenario B: List with realtor, sell 6 months later for $605,000.

• Basis: $620,000
• Sale price: $605,000
• Capital loss: $15,000
• Tax owed on the sale: $0

Scenario C: Hold for 2 years, then sell for $720,000.

• Basis: $620,000
• Sale price: $720,000
• Long-term capital gain: $100,000
• Federal tax (15% rate): $15,000
• California state tax (~9% rate): ~$9,000
• Total tax: ~$24,000

The cash sale at the lower price actually costs zero in tax and generates a usable capital loss. This is why the timing math on inherited property is different than for your own home.

When to call a CPA

You need a CPA if any of these apply:

• The estate is over $13.6 million (2026 federal estate tax threshold) — different game entirely
• The deceased had multiple properties or business interests
• You're inheriting in a state different from where you live
• You're considering 1031 exchange or installment sale
• The deceased was a non-resident alien
• You don't have a date-of-death appraisal yet

For a straightforward inherited California single-family home, most CPAs charge $400-$800 to prepare the relevant tax forms (Form 8949, Schedule D, federal and California Form 540). Worth it.

Bottom line

Stepped-up basis is the most valuable thing in inheriting property. Don't let it go to waste by missing the appraisal, mixing funds, or assuming the rules are simpler than they are.

The general principle: inherited California houses sold at or near date-of-death FMV usually generate little or no capital gains tax. Sales at substantially less than FMV generate a capital loss (good — it offsets other gains). Sales after several years generate gain on the appreciation since death (taxable but at long-term rates federal, ordinary rates California).

If you're trying to figure out what your specific situation looks like, the order is: appraisal first, CPA conversation second, sale strategy third. Skip step one and the rest gets harder.