This guide matters if you have just inherited a home or other real estate in California, or if you expect to do so soon. The tax rules here are different from most other states, and they changed in a big way a few years ago with Proposition 19. Getting the steps right from the start can save you from a surprise tax bill later.
Your first step is to learn about the step-up in basis. This is a federal tax rule, not a state one, but it matters for your California property. When you inherit a house, its tax basis is not what the original owner paid for it. Instead, the basis becomes the fair market value on the date of death. If you sell the home soon after inheriting it, this step-up in basis means you might pay little or no capital gains tax. For example, if the house was bought for fifty thousand dollars decades ago and is now worth six hundred thousand, your gain for tax purposes is based on that six hundred thousand, not the old fifty thousand. This can be a big relief if you need to sell.
Your second step is to check whether your transfer is subject to a property tax reassessment under Proposition 19. This is a California law that changed parent-to-child and grandparent-to-grandchild transfers. Under the old rules, children could inherit a parent’s home and keep the parent’s low property tax base, often for many years. Proposition 19 ended most of that. Now, if you inherit a home from a parent, the property taxes will generally be reassessed to the current market value, unless the home is your primary residence and you move in within one year. If you do move in and make it your home, you can keep some of the parent’s tax base, but only up to a limit. There are also special rules for farms and for inherited property that is worth more than one million dollars above the parent’s tax base. The county assessor’s office handles this, so you should contact them early.
Your third step is to figure out what to do with the property. Selling right away may be simple if the step-up in basis keeps your capital gains low. Keeping the property and renting it out means you face a full reassessment of property taxes under Proposition 19, because the parent-child exclusion for rental property is gone. Living in the house yourself is the one path that still gives you some tax protection, but only if you file the right forms with the county within a year.
Your fourth step is to plan for ongoing costs. Property taxes, insurance, maintenance, and possibly mortgage payments do not stop while the estate is being sorted out. If the house sits empty during probate or while family members argue, these costs eat into the estate’s value. You may need to have cash on hand to cover them.
Your fifth step is to get professional help. A tax accountant or a lawyer who knows California inheritance tax law can walk you through the county reassessment process and the federal estate tax rules. The federal estate tax threshold is high enough that most people do not owe it, but California does not have a separate state estate tax. The main tax danger is the property tax reassessment and the capital gains tax if you sell years later.
Your sixth step is to keep records. Write down the date of death, get an appraisal of the property’s value on that date, and save all receipts for any improvements or repairs you make. These numbers will matter when you file your taxes.
The final step is to file the correct forms with the county assessor. For a parent-child transfer of a primary residence, you need to file a claim for the parent-child exclusion. For any other inherited property, you may need to file a change in ownership statement. The deadlines are strict, so do not wait.
Inherited property tax in California is not simple anymore. But if you follow these steps, you can figure out where you stand and make a plan before costly surprises arrive.
A closer look is at read this tax guide.
