In California, real property is one of the most valuable assets you can inherit from a loved one. But inheriting real estate that has increased in value over time can trigger capital gains tax consequences when you sell that piece of property.
Report the sale on Schedule D (Form 1040), Capital Gains and Losses and on Form 8949, Sales and Other Dispositions of Capital Assets: If you sell the property for more than your basis, you have a taxable gain.
Upon the owner's death, the property typically receives a step-up in basis, which can reduce capital gains tax if the beneficiary sells the property. However, in some cases, state-specific tax implications could arise, potentially impacting the estate and the beneficiary.
Unless your parents put their estate in trust, their assets will go into probate. Even if you have lived there all your life, it will go to probate. If you are the only child then it will all likely go to go. If there are siblings, you may have to sell the house to divide the estate.
It depends on your personal circumstances. If you want to live in the home or use it as a rental property, keeping it obviously makes sense. If you don't want to do either — or if it needs significant work that you don't want to commit to — selling it will make more sense.
There are four ways you can avoid capital gains tax on an inherited property. You can sell it right away, live there and make it your primary residence, rent it out to tenants, or disclaim the inherited property.
Unlike an estate tax, beneficiaries pay the inheritance tax. It is usually due shortly after the beneficiary receives funds. Fortunately, only a handful of states still collect an inheritance tax. Those states with a tax have a relatively high exclusion amount before taxes are due.
While beneficiaries don't owe income tax on money they inherit, if their inheritance includes an individual retirement account (IRA), they will have to take distributions from it over a certain period and, if it is a traditional IRA rather than a Roth, pay income tax on that money.
As mentioned earlier, transferring ownership can trigger gift tax or capital gains tax (if the transfer involves a sale). Estate planning complications may also arise. If you decide to sell your home, your child's share could affect your eligibility for certain tax exemptions, such as the primary residence exclusion.
Inherited properties can come with financial responsibilities such as existing mortgages, unpaid property taxes, maintenance costs, and insurance requirements. Be aware of hidden costs, including emergency repairs, property management fees, and legal expenses.
Reporting the sale
Additionally, you must report the sale of the home if you can't exclude all of your capital gain from income. Use Schedule D (Form 1040), Capital Gains and Losses and Form 8949, Sales and Other Dispositions of Capital Assets when required to report the home sale.
Many people worry about the estate tax affecting the inheritance they pass along to their children, but it's not a reality most people will face. In 2025, the first $13,990,000 of an estate is exempt from federal estate taxes, up from $13,610,000 in 2024. Estate taxes are based on the size of the estate.
Your share of sales proceeds (generally reported on Form 1099-S Proceeds From Real Estate Transactions) from the sale of an inherited home should be reported on Schedule D (Form 1040) Capital Gains and Losses in the Investment Income section of TaxAct.
Inheritance checks are generally not reported to the IRS unless they involve cash or cash equivalents exceeding $10,000. Banks and financial institutions are required to report such transactions using Form 8300. Most inheritances are paid by regular check, wire transfer, or other means that don't qualify for reporting.
The good news is as long as you itemize your deductions, no matter if you decide to move into the home you inherited or keep it as a rental, you'll be able to deduct the property taxes.
Basically, it is a tax levied on the transfer of assets or property from one person to another after the original owner's death. The estate will pay the federal inheritance tax if the estate is worth more than $12,920,000 and the original owner passed away in 2023.
However, distributions from an inherited traditional IRA are taxable. This is referred to as “income in respect of a decedent.” That means if the owner would have paid tax, the income is taxable to the beneficiary.
If you received a gift or inheritance, do not include it in your income. However, if the gift or inheritance later produces income, you will need to pay tax on that income.
If you are inheriting a house that is paid off, in most cases, you will still need to go through probate. Some states may allow you to bypass probate if a quitclaim deed was executed properly. However, it is likely that you will still need to go through probate even if you are inheriting a house with no mortgage.
The straightforward answer is no, and there is no specific time limit on selling an inherited property. However, certain factors will influence the timeline of the sale process. Understanding these nuances is key to ensuring a smooth and compliant sale.
All About the Stepped-Up Basis Loophole. A stepped-up basis is a tax provision that allows heirs to reduce their capital gains taxes. When someone inherits property and investments, the IRS resets the market value of these assets to their value on the date of the original owner's death.
Beck, Lenox & Stolzer Estate Planning and Elder Law, LLC, knows from experience how bad behavior can erupt among the siblings as well. Many people think children automatically inherit a house when their parents die, but this isn't true. It's possible for children to inherit without a will, but it doesn't always happen.
For example, if you purchased your home 15 years ago for $150,000 and your estate executor sold it for $500,000, your estate would be on the hook for the $350,000 in realized capital gains. At a 15 percent long-term capital gains tax rate, that would be a $52,500 tax bill.