Selling an Inherited Home in California: What Taxes Will You Owe?

Introduction

If you’ve inherited a home in Costa Mesa or Newport Beach, understanding California’s tax obligations is crucial before selling. Let’s break down what taxes you might owe and how to minimize costs legally.

1. Capital Gains Tax & the Step-Up in Basis Rule

💰 How Capital Gains Tax Works for Inherited Homes

• Normally, if you sell a home for more than you paid, you pay capital gains tax on the profit.
• However, with inherited properties, the IRS offers a Step-Up in Basis rule, meaning:
  • You only pay taxes on the difference between the sale price and the home’s fair market value at the time of inheritance.

📌 Example:

• Home’s original purchase price: $300,000
• Home’s value when inherited: $1,200,000
• Sale price: $1,250,000
• Taxable amount: $50,000 (not the full $950,000 profit!)

2. Property Taxes & Prop 19 in California

🏡 Will Your Property Taxes Increase?

• Under Prop 19, if you keep the inherited home but don’t use it as your primary residence, the property will be reassessed at market value.
• If you sell, property tax reassessment does not apply to you.

3. Estate Taxes: Do You Owe Anything?

• Federal Estate Tax applies only if the estate is worth over $13.61 million (2024 limit).
• California does not have a state estate tax.

🚨 How to Reduce Taxes:

• Sell quickly to minimize capital gains tax.
• Consider 1031 exchanges if reinvesting in real estate.
• Consult a tax professional to maximize exemptions.