California does not have a separate capital gains tax for inherited property. Capital gains are taxed as ordinary income at state rates up to 13.3%. However, inherited property receives a stepped-up basis to fair market value at the date of death under IRC Section 1014, which often eliminates most or all capital gains if sold soon after inheritance.

When you inherit property in California, taxes are often your biggest financial concern. The good news: California has no state-level inheritance tax or estate tax. The more nuanced news: you may owe capital gains taxes when you sell, depending on timing and strategy.

Understanding the stepped-up basis rule is the key to minimizing your tax burden. This single provision can save California heirs hundreds of thousands of dollars on appreciated real estate.

What Is Stepped-Up Basis?

Stepped-up basis is a tax provision that resets an inherited asset's cost basis to its fair market value at the date of the owner's death. Instead of inheriting your parents' original purchase price from 1980, you inherit today's market value.

Example:

• Your parents bought their Pasadena home in 1985 for $150,000
• At death in 2025, the home is worth $1,200,000
• Without stepped-up basis: Your cost basis would be $150,000, meaning $1,050,000 in taxable gain
• With stepped-up basis: Your cost basis becomes $1,200,000
• If you sell for $1,200,000: Zero capital gains tax

This is why timing matters enormously. Selling quickly after inheriting typically results in minimal taxable gain because the sale price is close to the stepped-up basis.

California's Community Property Advantage

California is a community property state, which provides an additional tax benefit for surviving spouses. When one spouse dies, both halves of community property receive a stepped-up basis—not just the deceased spouse's half.

2025 Tax Rates

Federal Capital Gains Rates (2025):

• 0% for income up to $48,350 (single) / $96,700 (married filing jointly)
• 15% for income $48,351-$533,400 (single) / $96,701-$600,050 (married)
• 20% for income above these thresholds

California State Tax:

California taxes capital gains as ordinary income with no special rate. The top marginal rate is 13.3%, among the highest in the nation. Combined with federal taxes, California residents can face total capital gains rates exceeding 33%.

Tax-Minimization Strategies

1. Sell Quickly

The closer you sell to the date of death, the closer your sale price will be to your stepped-up basis.

2. Convert to Primary Residence

If you live in the inherited home as your primary residence for at least two of the five years before selling, you can exclude up to $250,000 of gain (single) or $500,000 (married) under IRC Section 121.

3. 1031 Exchange

If the inherited property is an investment property, you can defer capital gains through a 1031 exchange into another investment property.

4. Installment Sale

Spreading the sale over multiple tax years can keep you in lower tax brackets each year.

Frequently Asked Questions

Do I have to pay taxes when I inherit property in California?

Not on the inheritance itself. California has no inheritance tax or estate tax. You only owe capital gains tax when you sell the property, and only on appreciation above the stepped-up basis.

How do I prove the stepped-up basis?

Obtain a professional appraisal dated as close to the date of death as possible. Keep this documentation permanently—you'll need it when you sell to prove your cost basis to the IRS.

What if I inherited property years ago and never sold?

You can still use the stepped-up basis from the original date of death. Get a retrospective appraisal. The stepped-up basis doesn't expire.

Tax Disclaimer: This article provides general information only. Consult with a qualified CPA or tax attorney for advice specific to your situation.

Related Guides

• How Prop 19 Saves (or Costs) You Money on Inherited Property
• Trust vs Probate in California
• Complete Guide to Selling Inherited Property in California

Questions About Inherited Property Taxes?

The Borges Real Estate Team works closely with CPAs and tax attorneys to help families understand the full financial picture.

📞 (213) 262-5092

Justin Borges

Justin Borges is a Pasadena-based real estate specialist with 13+ years of experience helping families navigate inherited property sales. While not a tax professional, Justin works closely with CPAs and estate attorneys to ensure clients understand the full financial picture before selling.