Do I Pay Taxes When I Sell an Inherited House? Step-Up in Basis Questions for a Tax Professional

Sometimes, but often less than heirs fear. When you sell an inherited house, federal income tax generally falls only on the gain above your basis, and an heir's basis is generally the house's fair market value on the date of death, the so-called step-up. A sale soon after the death at close to that value may leave little taxable gain; a later sale at a higher price, a house that was rented, or a title held with a surviving co-owner can change the answer. A tax professional should run your numbers before you close.

This article describes how the rules work and lists the questions to bring to that professional. It does not tell you what you owe.

Do you pay capital gains on an inherited house?

The IRS says the money from selling inherited property is generally taxable, and that you have a taxable gain if you sell for more than your basis. The arithmetic has three parts:

• Amount realized: the sale price minus selling costs such as escrow, title and commissions.
• Basis: generally the fair market value on the date of death, plus improvements made after it.
• Gain or loss: the difference between the two.

Inherited property is treated as held for more than a year no matter how soon you sell, so any gain is long-term. The sale is reported on Form 8949 and Schedule D. Whether a sale below the date-of-death value produces a deductible loss depends on how the house was used after the death, which is a question for your tax professional.

What is step-up in basis?

Basis is the starting value the tax code measures gain from. For a house you bought, it is roughly what you paid. For a house you inherit, IRS Publication 551 sets it at the fair market value on the date of death, or on an alternate valuation date if the estate's personal representative elects it on an estate tax return. When an estate tax return was filed, the value reported on it is generally your basis. The parents' original purchase price usually stops mattering.

Two California facts change the picture:

• Community property. California is a community property state. Publication 551 says that when a spouse dies, the value of the whole community property, including the survivor's half, generally sets the basis. A surviving parent who later sells may therefore start from a fully reset basis.
• Joint tenancy and other co-ownership. When a house was held with someone other than a spouse, or as separate property, often only the share that passed at death is stepped up. How the deed was worded matters, so bring it.

How is the date-of-death value established?

This is where the four kinds of value matter, because only one of them is built to answer this question.

• An automated estimate is an algorithm's figure that never saw the house. It is weak evidence of anything.
• A CMA is a licensed agent's opinion of likely sale price, made to price a listing.
• A certified appraisal by a state-licensed appraiser, valued as of the date of death, is what estates and tax preparers usually rely on. It can be prepared after the fact for a past date. In a probate, the court's probate referee also values the house for the inventory.
• A cash purchase offer is a price a buyer will pay today on stated terms. It is not a valuation, and it is not dated to the death.

Mr. Cali Offers does not prepare appraisals. Mr. Cali Appraisals, a separate appraisal practice that shares the Mr. Cali name, explains how a date-of-death appraisal works.

Does the 2-year rule apply to an inherited house?

The 2-year rule is the home sale exclusion in Section 121, which lets an owner exclude gain on a main home they owned and lived in for at least 2 of the 5 years before the sale. An heir who never lived in the house generally does not meet it, which is one reason the step-up matters so much. Two cases deserve a closer look with your professional:

• A surviving spouse. IRS Publication 523 lets a surviving spouse who has not remarried count the late spouse's ownership and use, and allows a higher exclusion when the home is sold within 2 years of the death and other conditions are met.
• An heir who moves in. Living in the inherited house as a main home changes the facts. Ask before you plan around it.

Is there an inheritance tax in California?

California does not impose its own inheritance tax, according to the State Controller's Office. The federal estate tax is a tax on the estate, not on each heir, and it applies only to estates above an exemption the IRS sets each year. Your estate's attorney or tax professional will know whether a return was required, and if one was filed, its value controls your basis.

Property tax is a separate question

Income tax is owed on the sale. Property tax keeps arriving while the heirs own the house, and a death changes it:

• Reporting. The Board of Equalization says a change in ownership from a death is reported to the county assessor within 150 days of the death when there is no probate, or with the inventory and appraisal when there is one.
• Reassessment. Unless an exclusion applies, the house can be reassessed to current value as of the death.
• Proposition 19. Under Revenue and Taxation Code section 63.2, the parent-child exclusion now covers a family home only when it was the parent's principal residence and becomes the child's, with filing deadlines and a value limit. Heirs who sell do not usually keep it.

Any unpaid tax collector bills are paid from the proceeds at closing. Our guide to selling a deceased parent's house that is still in their name covers the assessor and tax collector steps.

What happens at closing: reporting and withholding

Escrow generally reports the sale to the IRS on Form 1099-S. California adds real estate withholding: escrow withholds part of the price for the Franchise Tax Board on Form 593 unless an exemption applies. The Form 593 instructions list exemptions, including one for a property that was the decedent's principal residence when the decedent's estate sells it. Ask escrow and your tax professional early which, if any, applies, so the withholding is not a surprise on the settlement statement.

Questions to bring to a tax professional

1. What is my basis, and what evidence of the date-of-death value will you accept?
2. Was the house community property, and does the full step-up apply?
3. Was an estate tax return filed or required, and does its value bind me?
4. Who reports the sale: the estate, the trust or each heir?
5. Do the clean-out and repairs count as selling costs, improvements or neither?
6. If the house was rented after the death, how does depreciation change the gain?
7. If the price comes in below the date-of-death value, is the loss deductible?
8. Does any Form 593 exemption apply, and should we plan for withholding?
9. If one heir moves in, does Proposition 19 or the home sale exclusion change the plan?

How the two numbers help that conversation

A tax professional needs the amount realized, and an offer sheet is built to show it. The as-is cash offer and the open-market read each come with the comparable sales, the line-item deductions and the net, so the professional can estimate gain under both paths. The cash path usually ends at a lower price, which can mean less gain above the step-up; the open market usually brings more. Listing nets more after tax when the house shows well, a lender would finance it as it stands, and the heirs can carry it through preparation and showings. When it does, the written recommendation says so and the family is introduced to a designated local expert, an independently licensed agent. Mr. Cali Offers never lists a house.

What this looks like in practice

These are the kinds of files that come in, described without names or figures.

• A North Claremont ranch house held as community property, where the second parent died years after the first, and the question for the tax professional is which death sets the basis. See our Claremont page.
• A Pomona house the heirs rented out for a while under the city's rent stabilization rules before deciding to sell, where depreciation enters the gain. See our Pomona page.
• A Chino Hills house in a newer tract with a community facilities district special tax on the bill, where the trustee needs the net to show that tax correctly. See our Chino Hills page.

The full sequence for heirs is in selling an inherited house in Southern California, and timing during probate is in whether you can sell before probate is complete. More is in the inherited houses guides. When you are ready for numbers, start on our inherited house page. There is no cost and no obligation to get the two numbers and the written report. Call (909) 498-3977.

Sources

• IRS Publication 551, Basis of Assets (inherited property; community property): irs.gov/publications/p551 (accessed October 31, 2026)
• IRS, Gifts and inheritances FAQ (sale of inherited property; basis): irs.gov (accessed October 31, 2026)
• IRS Publication 544, Sales and Other Dispositions of Assets (holding period of inherited property): irs.gov/publications/p544 (accessed October 31, 2026)
• IRS Publication 523, Selling Your Home (ownership and use test; surviving spouse; home inherited): irs.gov/publications/p523 (accessed October 31, 2026)
• IRS, Estate Tax: irs.gov (accessed October 31, 2026)
• IRS, About Form 1099-S: irs.gov (accessed October 31, 2026)
• California State Controller's Office, estate tax information: sco.ca.gov (accessed October 31, 2026)
• California Franchise Tax Board, Form 593 instructions (real estate withholding and exemptions): ftb.ca.gov (accessed October 31, 2026)
• California State Board of Equalization, Proposition 19 (Revenue and Taxation Code section 63.2): boe.ca.gov/prop19 (accessed October 31, 2026)
• California State Board of Equalization, change in ownership FAQs (reporting after a death): boe.ca.gov (accessed October 31, 2026)

Mr. Cali Offers is not a tax adviser, accountant or law firm, and this article describes general rules only. Cash offers come from independent buyers and investors who buy for their own account and may resell for profit; a cash offer is generally below what the open market would bring. Any value shown is a preliminary estimate, not an appraisal. Nothing here is legal, tax or financial advice.