What to Do With an Inherited House in California

Most families holding a parent’s house in California are sitting on decades of appreciation. A house bought for $150,000 in 1979 is worth $1.4 million today in much of Ventura, Santa Barbara, and Los Angeles counties. People assume that gap is a tax bill waiting to happen. In most cases it disappeared the day the owner died.

Figures are current as of September 30, 2026. The Prop 19 exclusion amount changes on February 16, 2027.

The first 90 days after you inherit a California house

Two of these deadlines run whether or not anyone has opened probate or read the trust.

1. Find out who has authority. If the house is in a living trust, the successor trustee named in the trust controls it. If it’s in the decedent’s name alone, nobody can sell or refinance it until a court appoints an executor or administrator and issues letters. If it was held as joint tenancy or community property with right of survivorship, the survivor records an affidavit of death (Prob. Code § 210) and owns it outright.
2. Secure and insure it. Change the locks, keep the utilities on, and call the homeowner’s insurer. Many policies limit coverage once a house sits vacant for 30 or 60 days, and a policy in a dead person’s name is a claim waiting to be denied.
3. Keep paying the mortgage. The loan doesn’t die with the borrower. Federal law bars the lender from calling a residential loan just because it passed to a relative at death (12 U.S.C. § 1701j-3(d)), but missed payments are still missed payments. A reverse mortgage is different and comes due at death (see below).
4. Order a date-of-death appraisal. This number becomes your tax basis. Use a licensed appraiser giving an opinion of value as of the date of death, not a realtor’s opinion and never the assessor’s value. In probate, the court’s probate referee appraises the house (Prob. Code § 8900 et seq.), and that value usually serves.
5. File the change in ownership statement. Form BOE-502-D goes to the county assessor within 150 days of the death, or in a probate, when the inventory and appraisal is filed (Rev. & Tax. Code § 480(b)).
6. Start the Prop 19 clock. If a child is going to live there, that child has one year from the date of death to move in and file for the homeowners’ exemption. This deadline doesn’t wait for the trust to be administered or the probate to close.
7. Don’t sign anything with a cash buyer yet. The “we buy inherited houses” offers arrive fast. Until you know who holds title and what the house is worth, nobody has the authority or the information to accept one.

Trust or probate: how the path changes your timeline

The tax rules don’t care whether the house came through a trust or through probate. The basis step-up, Prop 19, and California’s income tax apply the same way to both. What changes is who can sign and how long it takes to get there.

If the house was supposed to be in the trust but isn’t

The problem I see most often is a trust that exists and a deed that never moved, which leaves the house in a dead person’s name. A Heggstad petition asks the court to confirm the house belongs to the trust anyway (Prob. Code § 850; Estate of Heggstad (1993) 16 Cal.App.4th 943), which is usually faster and far cheaper than full probate. More on that in the house was never put in the trust.

If the house is worth $750,000 or less and there’s no trust

For deaths on or after April 1, 2025, a primary residence with a gross value up to $750,000 can pass by a simpler court petition under Prob. Code § 13151 instead of a full probate. Given California prices, that helps fewer families than it sounds like, but it’s worth checking before anyone files. See when the only asset is the house.

Your basis: why the original purchase price usually doesn’t matter

Basis is the number the IRS subtracts from your sale price to find the taxable gain. For inherited property, the basis is the fair market value on the date of death, not what the decedent paid (IRC § 1014(a)). That reset is the step-up in basis, and it applies to houses held in a revocable living trust the same way it does to houses that go through probate.

Inherited property also counts as long-term automatically, no matter how briefly you own it (IRC § 1223(9)). Inherit on Monday, sell on Friday, and any gain still gets the long-term rate.

Community property gets a full step-up at the first death

When a married couple owns a house as community property and one spouse dies, both halves step up to full market value, not only the half that belonged to the spouse who died (IRC § 1014(b)(6)). If the same couple held title as plain joint tenancy and the house was separate property, only the decedent’s half steps up. How the house was characterized can be worth hundreds of thousands of dollars to the surviving spouse. See community property vs. separate property step-up.

The bypass trust trap: no second step-up

Many older California trusts split into two or three subtrusts when the first spouse died, usually called an A trust (the survivor’s) and a B, bypass, or credit shelter trust. Property allocated to the bypass trust stepped up at the first death and then froze. It is not included in the surviving spouse’s estate, so it gets no second step-up when the survivor dies.

If the family house went into the bypass trust in 2012 at $700,000 and the surviving parent dies in 2026 with the house worth $1.6 million, the basis is still $700,000. Sell it and roughly $800,000 of gain is taxable. The fixes (giving the surviving spouse a general power of appointment, a court modification, distributing the house to the survivor) all have to happen while the survivor is alive. If you’re the child of a surviving parent with an old A-B trust, this is the conversation to have now. More in stepped-up basis in a California trust.

Other places the step-up doesn’t reach

• Lifetime gifts. A house a parent deeded to a child during life carries the parent’s old basis. Adding a child to the deed “to avoid probate” gives up the step-up on the child’s share.
• Irrevocable grantor trusts whose assets aren’t included in the decedent’s estate get no step-up (Rev. Rul. 2023-2). See irrevocable trusts and the step-up.
• Property gifted to the decedent within a year of death that comes back to the person who gave it keeps its old basis (IRC § 1014(e)).

Your five options, compared

Every inherited house ends up in one of five places.

Option 1: Sell the house

For most families who aren’t going to live there, selling within a year is the cleanest result. The gain is measured from the date-of-death value, and after commissions and closing costs, many prompt sales show a small loss.

Federal tax. Any gain is long-term. For 2026 the 20% rate starts at $545,500 of taxable income for a single filer and $613,700 for a married couple filing jointly, and the 3.8% net investment income tax applies above $200,000 and $250,000 of modified adjusted gross income (Rev. Proc. 2025-32; IRC § 1411). If the trust or estate sells and keeps the proceeds, the gain is taxed at the trust’s own compressed rates, so the 20% long-term rate starts at just $16,250 of income in 2026, unless the gain is carried out to the beneficiaries, which usually happens only in the trust or estate’s final year or when the trust document allocates gains to income (Treas. Reg. § 1.643(a)-3).

California tax. California has no capital gains rate. Gain is ordinary income, taxed up to 12.3%, plus the 1% Mental Health Services Tax on income over $1 million (Rev. & Tax. Code §§ 17041, 17043). California follows the federal step-up (Rev. & Tax. Code § 18031), so the same small gain is small on both returns. California has no inheritance tax and no estate tax.

Withholding at escrow. Escrow withholds 3⅓% of the sales price for California unless an exemption applies (Rev. & Tax. Code § 18662; FTB Form 593). Two exemptions matter here. A trust or estate selling a house the decedent last used as a principal residence is exempt. And any seller can certify a loss or zero gain, which is common after a step-up. Get Form 593 right before closing; once escrow withholds, the money only comes back as a credit on next year’s return.

Deducting a loss. Sometimes you can. A loss on a house that no heir ever used personally, listed for sale promptly, is generally deductible as a loss on property held for profit (IRC § 165(c)(2)). If you or a family member moved in or used it as a vacation place, the loss is personal and not deductible. When a trust or estate takes the loss and closes, an unused capital loss carryover passes to the beneficiaries on the final return (IRC § 642(h)).

The home sale exclusion doesn’t carry over. The $250,000 exclusion for selling your own home requires that you owned and lived in it for two of the last five years (IRC § 121). An heir doesn’t inherit the parent’s years. A surviving spouse is the exception: the spouse counts the decedent’s time and can use the full $500,000 exclusion on a sale within two years of the death.

Transfer tax. Deeds that transfer property because of a death aren’t subject to documentary transfer tax (Rev. & Tax. Code § 11930), but a sale to a buyer is. Ventura and Santa Barbara counties charge $1.10 per $1,000 of value. Inside the City of Los Angeles, the city adds its own tax, and Measure ULA adds 4% on sales above $5.4 million and 5.5% at $10.9 million or more, for sales closing after June 30, 2026. The thresholds move every July 1. Measure ULA doesn’t apply to the inheritance itself, only to the sale.

For the trust side of a sale, see selling trust property in California and selling a house that’s in a trust or an estate. For the full capital gains treatment, see capital gains tax on inherited property in California.

Option 2: A child moves in and keeps the parents’ property tax base

Prop 19 lets a child keep a parent’s low assessed value on the family home, with three conditions and a cap (Cal. Const. art. XIII A, § 2.1; Rev. & Tax. Code § 63.2).

• The house was the parent’s principal residence.
• The child makes it the child’s own principal residence and files for the homeowners’ exemption (Form BOE-266) within one year of the death.
• Someone files the exclusion claim, Form BOE-19-P, within three years of the death and before the house is sold to anyone else (Form BOE-19-G for a grandchild, who qualifies only if the parent in between has died).

Only the parent’s factored base-year value plus $1,044,586 is protected for transfers from February 16, 2025 through February 15, 2027 (BOE Letter To Assessors 2025/009). Anything above that is added to the taxable value, and most families don’t see it coming. A house worth $1.4 million with a factored base-year value of $250,000 is reassessed to $355,414, not $1.4 million and not $250,000. The full math is in Example 3 below.

If the child later moves out, the exclusion ends and the house is reassessed as of the next January 1 lien date. Moving title into the child’s own LLC ends it too (BOE Letter To Assessors 2026/026). A rental or second home gets no exclusion at all. See Prop 19 and the inherited house for the reassessment rules in depth and how to file the Prop 19 exclusion for the forms.

Moving in has an income tax cost too. Once you use the house personally, you can’t deduct a loss on a later sale, and every dollar of appreciation after the date of death becomes taxable gain unless you live there long enough for your own § 121 exclusion.

Option 3: Keep it as a rental

Families keep inherited houses as rentals more often than the numbers justify.

• Property tax resets. A house no child lives in gets no Prop 19 exclusion, so the county reassesses it to market value as of the date of death. On a long-held house, that’s often a tenfold increase in the tax bill.
• Depreciation starts over, from a higher number. The depreciable basis is the stepped-up value allocated to the building, not the land, recovered over 27.5 years. When you eventually sell, that depreciation is taxed at up to 25% as unrecaptured § 1250 gain.
• Tenants come with it. An existing lease survives the owner’s death. Under AB 1482, a tenant who has been there 12 months can be removed only for just cause, and rent increases are capped at 5% plus inflation, 10% at most (Civ. Code §§ 1946.2, 1947.12). Single-family homes are exempt only if the owner gave the tenant a specific written notice, and many parents never did. City rent control in Los Angeles and Santa Monica can be stricter. See you inherited a house with a tenant in it.
• Co-ownership doesn’t stay friendly. Three siblings who inherit a rental also inherit a permanent argument about repairs, rent, and when to sell. The Prop 19 rules on sibling transfers make it expensive to unwind later.

On an LLC for the rental: in California it costs at least $800 a year and usually buys less protection than the same money spent on an umbrella policy. See should your California rental be in an LLC.

Option 4: Sell and do a 1031 exchange

A like-kind exchange defers the gain on investment real estate when the proceeds buy replacement investment property, with 45 days to identify and 180 days to close (IRC § 1031). Heirs ask about it constantly, and for a house sold soon after death it usually solves a problem that doesn’t exist: the step-up already erased the gain.

A 1031 starts to make sense when the heirs hold the house as a rental for a few years and it appreciates, or when a bypass trust carries an old basis.

• The same taxpayer has to sell and buy. If the trust or estate sells, the trust or estate has to buy. A beneficiary can’t take cash from a trust sale and do the exchange personally.
• The property has to be held for investment. A house the family lived in or used personally doesn’t qualify.
• Out-of-state replacement property triggers an annual California information return, FTB Form 3840, until the deferred gain is recognized (Rev. & Tax. Code § 18032). California still taxes that gain someday.

An heir who exchanges and holds until death gets one more benefit from the step-up: the deferred gain disappears when the replacement property steps up at the heir’s own death.

Option 5: One sibling buys out the others

Buyouts are where families most often lose the Prop 19 exclusion. Prop 19 protects only what passes from parent to child. If the house is distributed to three siblings equally and one then buys the other two out, the two-thirds bought from siblings is reassessed.

The better structure happens inside the trust, before distribution. California lets a trustee make unequal distributions of different assets (Prob. Code § 16246), and the BOE treats the whole house as passing from the parent when the child receiving it gets other assets worth less so the total stays equal, as long as the house doesn’t exceed that child’s share of the whole trust (BOE Letter To Assessors 2026/026). When there isn’t enough other money to balance the shares, the trust can borrow against the house to fund the siblings’ shares. The child keeping the house can’t be the lender. See buying out a sibling without losing the Prop 19 basis.

A trustee who wants to buy the house personally has a separate problem: that’s self-dealing, prohibited unless the trust allows it, every beneficiary consents in writing, or a court approves it (Prob. Code § 16004). See can a trustee buy the house from the trust.

Three worked examples

The numbers are round, and your CPA should run yours before you sign anything.

Example 1: Selling a $1.4 million house bought for $150,000

No federal or California tax on the sale. If nobody used the house personally, the $37,000 is a capital loss the trust or the heirs can use.

Compare the same house if the parents had deeded it to the kids during life. The basis stays at $150,000, and the gain is about $1,213,000. For a single heir with $100,000 of other income, that’s roughly $260,000 of federal tax (15% and 20% brackets plus the 3.8% net investment income tax) and roughly $140,000 of California tax, around $400,000 in all. Same house, same family, and the only difference is whether it passed at death.

Example 2: The bypass trust house

Had the house been in the survivor’s share, the same sale shows a loss. Once both parents have died, there’s no fixing this. The heirs can only plan around it: holding the house as a rental and exchanging it later, or spreading a sale across tax years with an installment note.

Example 3: A child moves in under Prop 19

Tax rates vary by tax rate area, usually between 1% and 1.25% of assessed value. The saving is roughly $11,500 a year, and it lasts only while the child lives there. The exclusion amount itself is adjusted every two years; the next change applies to deaths on or after February 16, 2027.

When the heirs disagree

A sibling living in the house rent-free

If the house is in a trust, the trustee decides who lives there, and a trustee who lets one beneficiary live there free while the others get nothing is breaching the duty of impartiality (Prob. Code § 16003). The trustee can charge fair rent, charge the rent against that sibling’s share, or remove the sibling through an unlawful detainer if it comes to that. See a sibling won’t move out of the trust house and living in a house during probate.

Forcing a sale

Once heirs hold the house directly as co-owners, any one of them can file a partition action and ask a court to divide or sell it (Code Civ. Proc. § 872.010 et seq.). California’s Partition of Real Property Act, which covers co-owners with no written agreement about partition, gives the other co-owners a court-ordered appraisal and 45 days to buy out the one who wants to sell, and prefers an open-market listing to an auction (Code Civ. Proc. §§ 874.311, 874.316, 874.317, 874.320). While the house is still in a trust, the route is a petition to the probate court (Prob. Code § 17200), not partition. See can siblings force the sale of an inherited house and what a sibling standoff costs.

Special cases

A reverse mortgage

A federally insured reverse mortgage (a HECM) comes due when the last borrower dies. Heirs who want to keep the house pay the lesser of the loan balance or 95% of the current appraised value. After the lender sends a due-and-payable notice, heirs have 30 days to pay, sell, or hand the house back, and that can often be extended to about six months to finish a sale or refinance, according to the Consumer Financial Protection Bureau. See inheriting a house with a reverse mortgage.

A surviving spouse is still living

A surviving spouse can use the full $500,000 home sale exclusion on a sale within two years of the death (IRC § 121(b)(4)), and on community property gets the full step-up on both halves. If the estate is large enough that estate tax could matter at the second death, filing a federal estate tax return to elect portability of the unused exemption can matter even when no tax is owed; the IRS allows a late portability election up to five years after the death in many cases (Rev. Proc. 2022-32). The federal estate tax exemption is $15 million per person in 2026.

Heirs in other states

The house is California property, so California taxes any gain on its sale no matter where the heir lives, and escrow will withhold under Form 593 unless an exemption applies. See out-of-state heirs inheriting from a California estate.

Decision checklist

• Confirm who holds title and who has authority: trustee, executor, administrator, or surviving co-owner.
• Order a date-of-death appraisal from a licensed appraiser.
• File BOE-502-D within 150 days of the death, or with the probate inventory.
• Check whether any part of the house sat in a bypass trust after an earlier death.
• Decide within the first year whether a child will move in; if so, file BOE-266 and BOE-19-P.
• Read any existing lease and check whether the AB 1482 exemption notice was ever given.
• If the heirs don’t agree, work out the buyout inside the trust before anyone takes title.
• Before listing, get the Form 593 exemption and the trust or estate tax return timing settled with your CPA.

If you’re a trustee or an executor holding a parent’s house in Ventura, Santa Barbara, or Los Angeles County, I can walk through your numbers with you: basis, Prop 19, who has to sign, and what the sale or distribution will cost. Talk to Eric Ridley is a free 30-minute consultation by phone or Zoom, anywhere in California. Or call (805) 244-5291.

Frequently asked questions

Do I pay capital gains tax when I sell an inherited house in California?

Usually very little. An inherited house takes a new basis equal to its value on the date of death (IRC § 1014), so capital gains tax applies only to appreciation after that date. A sale within a year or so, after commissions, often shows no gain or a small loss. California follows the same basis rule but taxes any gain as ordinary income.

How long do I have to sell an inherited house in California?

California law doesn’t set a deadline to sell an inherited house in California. The deadlines that matter are the one-year window for a child to move in and keep the Prop 19 exclusion, the 150-day BOE-502-D filing, and, with a reverse mortgage, the lender’s repayment window. Waiting longer lets new, taxable appreciation build above the stepped-up basis.

Does a house in a living trust get a step-up in basis?

Yes. A house held in a revocable living trust is included in the owner’s estate, so it gets the same step-up to date-of-death value as a house that goes through probate (IRC §§ 1014, 2038). The exceptions are property in an irrevocable grantor trust that isn’t included in the estate and property in a bypass trust created at an earlier death.

Is there a second step-up when the surviving parent dies if the house is in a bypass trust?

No. A house held in a bypass, B, or credit shelter trust stepped up at the first spouse’s death and isn’t included in the surviving spouse’s estate, so it gets no second step-up when the survivor dies. The basis stays at the first-death value. Any fix has to be made while the surviving spouse is alive.

Can I keep my parents’ low property tax if I rent out the inherited house?

No. The Prop 19 parent-child exclusion applies only if a child makes the house the child’s own principal residence within one year and files for the homeowners’ exemption (Rev. & Tax. Code § 63.2). An inherited house used as a rental or second home is reassessed to market value as of the date of death.

How much property tax will I pay if I move into my parents’ house under Prop 19?

For deaths from February 16, 2025 through February 15, 2027, the new taxable value is the parent’s factored base-year value plus any market value above that base plus $1,044,586. A $1.4 million house with a $250,000 base is reassessed to $355,414, roughly $3,900 a year at a 1.1% rate.

Can I deduct a loss if the inherited house sells for less than its date-of-death value?

Often, yes. A loss on an inherited house that no heir used personally, held for sale or rental, is generally deductible as a capital loss (IRC § 165(c)(2)). If an heir moved in or used the house personally, the loss is a nondeductible personal loss. Selling costs count toward the loss.

Will escrow withhold California tax when a trust or estate sells the house?

Escrow withholds 3⅓% of the sales price unless the seller certifies an exemption on FTB Form 593 (Rev. & Tax. Code § 18662). A trust or estate selling a house the decedent last used as a principal residence is exempt, and so is any sale with a loss or zero gain, which is common after a step-up.

Can I do a 1031 exchange on a house I inherited?

Yes, if the house is held for investment and the same taxpayer that sells buys the replacement property (IRC § 1031). A house sold soon after death usually has little gain to defer because of the step-up. A 1031 exchange makes more sense for an inherited house held as a rental for several years or one carrying an old bypass trust basis.

Can the trustee sell the house without the beneficiaries’ approval?

Usually, yes. California gives a successor trustee the power to sell trust property (Prob. Code § 16226), and most trusts say so expressly. The trustee still owes every beneficiary a duty of impartiality and a full accounting of the proceeds, and must give the trust notice required by Prob. Code § 16061.7.

Can I sell an inherited house before probate is finished?

Yes, once the court appoints a personal representative and issues letters. With full authority under the Independent Administration of Estates Act, the representative can sell after giving heirs a Notice of Proposed Action at least 15 days in advance (Prob. Code § 10586). With limited authority, the sale needs court confirmation.

Can my siblings force a sale of the inherited house?

Once siblings own the house together outright, any one of them can file a partition action (Code Civ. Proc. § 872.010). Under California’s Partition of Real Property Act, the others can buy out that sibling’s share at a court-determined value within 45 days of the valuation (Code Civ. Proc. § 874.317). While the house is still in a trust, the trustee decides.

Does California have an inheritance tax?

No. California repealed its inheritance tax in 1982 and has no estate tax. The federal estate tax applies only to estates above $15 million per person in 2026. Heirs of a California house deal with income tax on any post-death gain and with property tax reassessment under Prop 19, not with a tax on the inheritance itself.