Costs of Selling Inherited Property in California

Authority to Sell: Probate, Trusts, and Simplified Procedures

Under Probate Code section 8400, a person has no power to administer an estate until the court appoints them personal representative and letters are issued. Letters are the court document that makes the appointment effective. This is true even for someone named executor in the will. The one exception is that a named executor may pay funeral expenses and take necessary measures to maintain and preserve the estate before letters issue.

The California Courts' Overview of formal probate says a probate case is filed in the county where the decedent lived. If the decedent lived outside California, it is filed in the California county where they owned property.

Court confirmation or independent authority. Under Probate Code section 10308, a sale of estate real property generally must be reported to the court and confirmed before title passes, except as Probate Code section 10503 provides. A court may grant the personal representative full authority under the Independent Administration of Estates Act. A representative with that authority generally gives interested persons a notice of proposed action first. If no one objects, the sale can go forward without a confirmation hearing. Under Probate Code section 10503, the court-confirmation requirements, such as published notice of sale, court approval of commissions, the appraised-value rule and the court's examination of the sale, do not apply to a sale made with that authority. The steps of a probate sale in California follow from which of these paths applies.

Statutory fees. The personal representative and the estate's attorney each receive compensation for ordinary services. Probate Code sections 10800 and 10810 set the same tiers for each:

• 4 percent on the first $100,000
• 3 percent on the next $100,000
• 2 percent on the next $800,000
• 1 percent on the next $9,000,000
• one-half of 1 percent on the next $15,000,000
• a reasonable amount set by the court above $25,000,000

These fees are measured on the inventory's appraisal value, plus gains on sales and receipts, less losses on sales. Encumbrances such as a mortgage are not subtracted. The California Courts add that the costs of administration "are often well over $1,000.00 and can be much more," and that the fees are usually paid at the end of the case.

Trusts and transfer on death deeds. A successor trustee generally sells trust real property under the trust document, without a probate appointment. The trustee still owes duties to the beneficiaries. Under Probate Code section 5652, a revocable transfer on death deed passes the property to the named beneficiaries at death. Two or more beneficiaries take it as tenants in common in equal shares; each beneficiary's interest depends on surviving the owner, and a share that lapses or fails for any reason passes to the others in equal shares. They take it subject to recorded liens and without a warranty of title.

Simplified procedures. California offers four simplified procedures, each named by what it covers:

• the affidavit for collection or transfer of personal property
• the petition to determine succession to the decedent's primary residence
• the affidavit for real property of small value
• the spousal or domestic partner property petition

Under Probate Code section 13151, the primary-residence petition may be filed once 40 days have passed since the death. Under Probate Code section 13200, the real-property affidavit may be filed no sooner than six months after the death. Under Probate Code sections 13151 and 13200, the value limits for these two procedures are adjusted periodically, and the California Courts' Guide to property after someone dies explains how to figure out which process can be used to transfer property.

If heirs or a trustee are in conflict, the matter becomes a contested one. A contested matter is handled by an attorney who litigates trust and probate cases.

Transaction Costs: What It Costs to Close the Sale

Closing costs come out of the sale proceeds. The main items are these:

• Agent commission. The commission is negotiated between the seller and the agent. In a court-confirmed probate sale, Probate Code section 10161 sets it at the amount the court finds reasonable, and it cannot exceed the amount in the agent's contract. The California Department of Real Estate's update Looking for Tips on How to Choose a Real Estate Agent? urges sellers to verify an agent's license before hiring them.
• Escrow and title. These fees are divided between buyer and seller by local custom and by negotiation.
• Documentary transfer tax. Rev. & Tax. Code section 11911 lets a county impose a tax of $0.55 for each $500 of value when the value exceeds $100. The value excludes any lien that remains on the property. A city in that county may add half that rate, and the county credits the city's tax against its own. The county recorder and the city publish what actually applies.
• Carrying costs. Property tax, insurance, utilities and any HOA dues keep running until the sale closes.

Disclosures. Under Civil Code section 1102.2, the disclosure article of the Civil Code that the section belongs to does not apply to sales ordered by a probate court. It also does not apply to sales by a fiduciary administering a trust or a decedent's estate. That fiduciary exemption has a limit. It does not cover a trustee of a revocable trust who is a natural person and a former owner of the property, or who occupied it within the preceding year. Other disclosure duties may still apply, and the estate's attorney can say which ones.

Value. The California Courts note that the personal representative usually contacts a probate referee to value non-cash assets. A probate referee is an appraiser appointed by the State Controller. Outside probate, a licensed appraiser typically sets fair market value. That figure feeds both the price and the basis.

Ways to Sell and How They Compare

Each way to sell carries tradeoffs:

• A listing with an agent. A listing usually reaches the widest pool of buyers. It also involves a commission and often some preparation.
• A sale by the owner. The owner pays no listing commission but handles the marketing, negotiation and paperwork.
• A direct as-is sale. A buyer who pays cash takes the house as it stands. Its offer is often lower than an open-market price, because that buyer absorbs the repairs, the risk and the cost of reselling. In return, the seller has less preparation, fewer showings and less dependence on a buyer's loan.

A house can be sold in its present condition, and the tradeoffs for an inherited house that needs repairs are part of the comparison. Families tell which way fits by comparing written offers and estimated net proceeds. Net proceeds are the price less commissions, repairs, carrying costs, loan payoffs and closing costs. Weighing a cash offer against a listing works the same way.

The Stepped-Up Basis and Capital Gains on an Inherited Property Sale

Siblings often worry that a parent's decades of appreciation will turn into a large tax bill. The federal rule usually points the other way.

Under 26 U.S.C. § 1014(a), the basis of property acquired from a decedent is generally one of the following:

• its fair market value at the date of death
• its value on the alternate valuation date, if that election is made under section 2032
• its value determined under section 2032A, if that election is made
• the decedent's own basis, to the extent the exclusion described in section 2031(c) applies

The IRS's FAQ on the sale of inherited property adds a condition: the alternate valuation date is available only if the executor files an estate tax return and elects it there.

Hypothetical: a parent bought a house long ago for a small sum, and it was worth far more at death. The heir's basis is the date-of-death value, not the old purchase price.

The IRS says that a sale for more than the basis produces a taxable gain. Its Frequently asked questions on estate taxes adds that "there is usually little or no gain to account for if the sale occurs soon after the date of death." Basis is a statutory rule, not a strategy for avoiding tax.

On the California side, the Franchise Tax Board's page on Estates and trusts says an executor may have to file a return for an estate in several situations, including when the decedent was a California resident or when the estate has income from a California source. That return is Form 541.

Whether a sale owes tax, and how much, depends on the price, the basis and the seller's own return. A CPA, an enrolled agent or a tax attorney reviews that question.

California Real Estate Withholding and the Franchise Tax Board

California withholding at closing applies to more sellers than many expect, and that includes heirs who live in California. Rev. & Tax. Code section 18662 generally requires the buyer to withhold 3⅓ percent of the sales price when a California real property interest is sold. The rule covers sellers who are individuals, as well as corporations and partnerships with no permanent place of business in California.

The section offers an alternative to the flat rate. The seller may instead elect to have an amount withheld that the seller certifies under penalty of perjury. That amount cannot be less than the recognized gain multiplied by the rate the statute specifies.

The same section lists the main situations in which no withholding is required, including these:

• the sales price is $100,000 or less
• the escrow person has not given the buyer written notice of the withholding requirement
• the buyer relies in good faith on the seller's certificate that the property was the seller's or the decedent's principal residence
• the buyer relies in good faith on the seller's certificate that the property is part of a qualifying like-kind exchange

The list continues with foreclosure situations and sales by a bank acting as trustee. Escrow handles the paperwork for the withholding.

The Franchise Tax Board's Estates and trusts page lists claiming withholding as one reason an estate or trust files Form 541. A CPA or tax attorney can explain how withholding on an heir's share is claimed. That question matters especially for an heir who lives in another state, where that state's law may also apply.

Property Tax Reassessment and Proposition 19

A transfer at death is generally a change in ownership, the event that lets the county reassess property to current value. Rev. & Tax. Code section 63.2 governs the parent-child and grandparent-grandchild exclusion for transfers on or after February 16, 2021. The grandparent-grandchild version applies only if all of the grandchild's parents who are the grandparents' children have died.

Under that section, the exclusion has several conditions:

• The home must be the transferor's principal residence.
• It must become the transferee's principal residence within one year.
• The transferee must file for the homeowners' or disabled veterans' exemption within a year.
• The exclusion is limited by a value cap, and the county assessor publishes the current figure.
• A claim must be filed with the assessor on the form the State Board of Equalization prescribes.

The claim must be filed within three years after the transfer, before the property is transferred to a third party, or before an eligible transferee stops occupying the home, whichever comes first. A claim also counts as timely if it is filed within six months after the mailing of a notice of supplemental or escape assessment. A later claim on property that has not been sold to a third party may be considered, but any exclusion it grants applies only from the lien date of the year in which it is filed.

The exclusion is built around a family member living in the home. When the plan is to sell, it often does not fit. In the meantime, property tax runs as a carrying cost, whether or not anyone lives in the house. County pages, such as the guide to selling inherited property in San Diego County, show how local rules apply. The county assessor's office answers reassessment and exclusion questions.