By Bill Gross, The LA Probate Expert — California broker (DRE #01022275) since 1986. This page is for families and heirs. It is not legal, tax, or lending advice.
Short answer
If you inherited the house, the usual starting point is the value on the date of death, not what your parents paid. That is called a step-up in basis. Tax, if any, is on the gain after that, minus the cost of the sale. I do not prepare the return. A CPA does. This page is so you can walk into that meeting with the right blanks filled in.
Fill in what you know
- Expected sale price. Use a real range, not one number from a website. What is the house worth is a start. An appraisal is better if siblings are buying each other out.
- Value on the date of death. This is the step-up for most inherited houses. If you do not have it, that is the number to get before you talk about listing price as if it were all profit.
- Cost of the sale. Commission, escrow, title, repairs you actually pay, and credits in the contract. These reduce the gain. They are not a round percent you invent.
- Gain. Sale price, minus selling costs, minus the date-of-death value (plus any improvements you paid for after death). If that number is small, the tax may be small. If the house jumped after the death, the gain is that jump, not 30 years of appreciation.
- A range, not a bill. Federal tax on a long-term gain is often 15% or 20%, and some filers also owe the 3.8% net investment income tax. California taxes the gain as ordinary income, at your rate, with no special low capital-gains rate. Your CPA applies the rates to your return. Do not multiply the gain by a single percent and treat it as what you owe.
Two situations that change the math
You were added to the deed before the death. If your name went on title while your parent was alive, you may not get a step-up on the whole house. Part of the gain can reach back to the old purchase price. Tell the CPA the date you were added and how the deed was written.
It was a rental. Depreciation taken over the years can come back as tax when you sell, even when the rest of the gain looks modest. Bring the last schedule E, or say you do not have it. Guessing that a rental is "the same as the house I grew up in" is how people get surprised.
Questions for the CPA
- Is the basis the date-of-death value, and do we have an appraisal that will hold up?
- Does any part of the house fail the step-up because of an earlier deed?
- If it was rented, how much depreciation has to be recaptured?
- Does a surviving spouse get a different basis than a child?
Property tax is not this tax
The bill from the county assessor is separate. Proposition 19 decides whether a child can keep a parent's low assessed value, and it depends on living in the house and filing on time. That is not capital gains. Do not mix the two when you are deciding whether you can afford to keep the house.
Back to what to do with a house you inherited.
Download the one-page version (PDF). It is the same answer, one page, for a family member who will not read the whole page.
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