Sell or Rent an Inherited Property?

How Inherited Property Is Taxed in California — the Step-Up in Basis

Basis is the starting value used to figure gain or loss when property is sold. For most purchases, it begins with what the owner paid. Inherited property works differently.

Under 26 U.S.C. § 1014(a), except as otherwise provided in that section, the basis of property acquired from a decedent is "the fair market value of the property at the date of the decedent's death," or, where the estate makes the election that text describes, its value at the alternate valuation date; the statute also lists two other alternatives, a value determined under a special-use valuation election and, to the extent a particular estate-tax exclusion applies, the decedent's own basis. This reset is commonly called the step-up in basis.

In plain terms, the step-up does not erase tax as a flat rule. It moves the measuring point to what the house was worth when the owner died, and any gain or loss is counted from there. A house a parent bought decades ago is measured from its value at death, not from the original purchase price.

If the family sells, the gain is the price less that basis (adjusted as the IRS describes). When a sale price is close to the date-of-death value, the measured gain is small. Under 26 U.S.C. § 1223(9), an heir whose basis is set this way and who sells within one year after the death is treated as having held the property for more than one year.

If the family rents, the same starting value carries forward. Under 26 U.S.C. § 167(c), depreciation (a yearly deduction for wear and tear on rental property) is figured from adjusted basis, so the date-of-death value becomes the starting point. The IRS's Publication 551, Basis of Assets notes that when property held for personal use is changed to rental use, the owner must figure its basis for depreciation. A later sale is measured against the adjusted basis at that time, not the decedent's purchase price.

For a surviving spouse, the same publication says that in California, a community property state, when a spouse dies the total value of the community property generally becomes the basis of the entire property, if at least half its value is includible in the decedent's gross estate.

Rental income and any sale gain are reported on California returns as well as federal ones. This article does not describe how California taxes either one; how these rules apply to a particular return, federal or California, is a question for a CPA, an enrolled agent or a tax attorney.

Proposition 19 and Property Tax Reassessment

Reassessment is the county assessor's reset of a property's assessed value to current market value when it changes owners. For a house a parent owned for decades, the reset can raise the annual tax bill sharply.

For transfers on or after February 16, 2021, the parent-child and grandparent-grandchild exclusion from reassessment is Rev. & Tax. Code section 63.2. The State Board of Equalization's Proposition 19 page explains that where the transferor died, the date of death is the date of change in ownership. Under the statute, the exclusion covers a principal residence of the parent that becomes the child's principal residence within one year of the transfer; the child files for the homeowners' or disabled veterans' exemption within a year of the transfer, and the exclusion is removed when no eligible transferee still qualifies for one of those exemptions. A grandchild qualifies only if the grandchild's parents who are the grandparents' children have died.

The exclusion also has a value limit. Rev. & Tax. Code section 63.2 keeps the existing taxable value when the home's market value is less than that taxable value plus $1,000,000; above that, the difference is added. The BOE's Proposition 19 Fact Sheet (Publication 801) says the $1 million is adjusted every other year and gives $1,044,586 for transfers from February 16, 2025, through February 15, 2027.

A claim is filed with the assessor within three years after the transfer, before a transfer to a third party, or before an eligible transferee stops occupying the home, whichever is earlier; it is also timely within six months after the mailing of a supplemental or escape assessment notice for the transfer. A late claim, if the property has not gone to a third party, applies from the lien date of the year it is filed.

What this means for the choice: the exclusion depends on an heir living in the house. The BOE's FAQ states that a rental home transferred between parents and children does not qualify. So if no heir moves in, the house will generally be reassessed, and the higher bill becomes a carrying cost in any rental math. If the family sells instead, reassessment matters mainly for the months the heirs hold the house. The county assessor's office confirms eligibility and the current figure.

What Selling an Inherited Property Involves

A sale can take three forms, and each moves at a different pace with different work.

Listing with a licensed real estate agent. The house is prepared, photographed, shown and offered on the open market. Preparation can include clearing belongings, cleaning and some repairs. Many buyers rely on a loan, so the sale can depend on an appraisal and lender approval. Open-market exposure is what can produce competing offers; the costs are commissions, preparation and the months of carrying costs while it sells.

Selling without an agent. An owner can market the house directly. This trades commissions for the family's own time on pricing, showings, paperwork and negotiation, with the same dependence on buyer financing.

A direct sale to a cash buyer, as-is. The buyer takes the house in its present condition, without a loan contingency. A direct offer is often lower than what the same house might bring on the open market, because the buyer is absorbing the repairs, the risk and the cost of reselling. In exchange, the family gets less preparation, fewer showings and less dependence on a lender. Silver Lining Inherited Property is one buyer a family can get an offer from for a direct as-is sale, and asking carries no obligation to sell.

Comparing these is mostly arithmetic. Written offers can be set side by side with estimated net proceeds: the price less commissions, repairs, carrying costs, loan payoffs and closing costs. The tradeoffs of selling a house that needs repairs and of a cash offer versus a listing follow the same reasoning.

Whichever method is used, the estate's authority, any court steps and any required notices stay the same. "As-is" describes the condition the buyer accepts, not a change in the seller's duties. On disclosure, Civil Code section 1102.2 says the Civil Code article on seller transfer disclosures does not apply to sales ordered by a probate court in administering an estate, or to sales by a fiduciary in the course of administering a trust or a decedent's estate; that fiduciary exemption does not apply where the trustee is a natural person who is trustee of a revocable trust and a former owner of the property, or was an occupant in possession within the preceding year. The estate's or trust's attorney can say which duties apply to a given sale.

What Renting an Inherited Property Involves

Renting starts with control. While the estate is open or the trust has not distributed the house, the personal representative or trustee generally decides about it, not the individual heir. A lease signed by someone without authority creates problems later.

Once someone has authority, the work is ongoing:

• Upkeep. Repairs and maintenance, often managed from a distance.
• Landlord-tenant law. California's rules on notices, entry, rent and ending a tenancy.
• Insurance. A policy suited to a rented house rather than an owner-occupied one.
• Property tax. Usually at the reassessed value (see the Proposition 19 section above).
• Income tax. Rent is taxable income at the federal and California level, offset by deductions that include depreciation figured from the date-of-death basis.

Two California statutes shape what a tenancy means for a later sale. Under Civil Code section 1946.2, after a tenant has continuously and lawfully occupied a residential property for 12 months, the owner generally cannot end the tenancy without just cause stated in the written notice; just cause includes listed tenant-fault reasons and listed no-fault reasons, including an owner or close relative moving in under conditions the statute sets, and withdrawal of the property from the rental market. Under Civil Code section 1947.12, rent increases over any 12-month period are generally capped at 5 percent plus the percentage change in the cost of living, or 10 percent, whichever is lower, subject to exemptions the statute lists, including certain single-family homes where the tenant received the required written notice. Many cities have their own rent rules as well. A house with a protected tenant can still be sold, but the tenancy shapes who will buy it and when.

When several heirs own the house together, they generally all need to agree on renting and on the terms, and that agreement has to hold for years. Some families also look at rental yield, the rent left after expenses compared with the home's value; that comparison is general guidance, not a rule.

Side-by-Side: Selling vs. Renting an Inherited Property

The biggest difference between the two paths is how long the family stays tied to the house.

No row decides the matter alone. The heirs' finances, the house's condition, where the estate stands and how many people share ownership all change how much each row weighs.

When the Estate Is Still Open: Authority to Sell or Rent

Before any path can start, someone has to have the power to sign.

In probate. A personal representative is the person the court appoints to administer an estate. An executor is the person named in the will for that role; an administrator is a person the court appoints when no executor serves. Under Probate Code section 8400, a person has no power to administer the estate until appointed personal representative, and the appointment becomes effective when letters are issued, whether or not the person is named executor in the will; before that, a named executor may only pay funeral expenses and take necessary measures to maintain and preserve the estate.

For a sale, Probate Code section 10308 says that, except as provided in Probate Code section 10503, all sales of estate real property must be reported to and confirmed by the court before title passes, and if the personal representative does not file the report and petition within 30 days after the sale, the purchaser may file them. Under Probate Code section 10503, when a personal representative sells under the authority the court granted under independent administration, the court-confirmation requirements, such as publication of notice of sale, court approval of agents' and brokers' commissions, sale at not less than 90 percent of appraised value and the court's examination of the sale, do not apply to the sale. Whether a particular sale needs confirmation depends on the authority granted and whether anyone objects to a notice of proposed action; the estate's attorney reads the order. The steps of selling during probate in California follow from that order.

In a trust. A successor trustee is the person named in a trust to take over after the original trustee. What a trustee may do with trust property, selling or leasing, depends on the trust document and California law; the trust's attorney reviews both.

After distribution or a transfer on death deed. The heirs may then own the house directly. Under Probate Code section 5652, two or more beneficiaries of that deed generally take as tenants in common in equal shares, subject to recorded liens and leases. Co-owners generally must agree to sell or rent. When they cannot, California's partition statutes let a court divide or order the sale of the property; a contested matter is a different subject, handled by an attorney who litigates trust and probate cases.