Inherited Property

Capital Gains Tax on Inherited Property California 2026

Updated February 19, 2026

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.

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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.

Real Example:

Original Purchase (1985)

$150,000

Value at Death (2026)

$1,200,000

Your New Cost Basis

$1,200,000

Capital Gains Tax

$0

If sold at $1,200,000

Why this matters: 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.

Spousal Benefit: If a married couple owned a $2M home in community property, and one spouse dies, the entire property gets stepped up to $2M—not just the deceased spouse's $1M half. This double step-up can save tens of thousands in taxes.

2026 Tax Rates

Federal Capital Gains (2026)

0% Income up to $49,450 (single) / $98,900 (married)

15% $49,451-$545,600 (single) / $98,901-$613,600 (married)

20% Above $545,600 (single) / $613,600 (married)

California State Tax

Capital gains taxed as ordinary income

13.3% Top marginal rate

Combined federal + state rates can exceed 33%

High-Income Earners

+3.8% Net Investment Income Tax (NIIT)

Applies when income exceeds $200K (single) / $250K (married)

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2026 Update: Federal thresholds increased for inflation. The 0% bracket now covers up to $49,450 (single) / $98,900 (married)—up from $48,350/$96,700 in 2025.

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, minimizing taxable gain.

2

Convert to Primary Residence

Live in the inherited home for at least 2 of 5 years before selling to exclude up to $250K (single) or $500K (married) under IRC Section 121.

3

1031 Exchange

If it's an investment property, defer capital gains by exchanging into another investment property.

4

Installment Sale

Spread the sale over multiple tax years to stay in lower brackets each year.

Not Sure Which Strategy Applies to You?

Every inherited property situation is unique. Let us run the numbers for your specific scenario—free of charge.

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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.

How does Proposition 19 affect inherited property taxes?

While Proposition 19 affects property tax reassessment on inherited property in California, it does not change the federal stepped-up basis rules for capital gains. However, if you don't qualify for Prop 19's parent-child transfer exclusion, your property taxes may increase substantially, which affects the overall cost of holding the property.

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 Your Inherited Property?

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

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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.

DRE #01940318 | eXp Realty of Greater Los Angeles