Reporting the Sale of Inherited Property

The Stepped-Up Basis: What It Is and How It Sets Your Starting Point

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

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

Which of these applies is a question for a CPA or an estate attorney.

"Stepped-up" is shorthand for the usual effect. Suppose the house was worth more at death than the decedent paid for it decades ago. The heir's basis rises to that higher value, which shrinks or erases the gain on a later sale. If the house was worth less at death than the decedent paid, the basis steps down. A change in value between the death and the sale does not change the basis; it shows up as gain or loss.

Community property has a special rule. Under 26 U.S.C. § 1014(b)(6), the surviving spouse's half of community property is treated as passing from the decedent. That applies if at least half of the whole community interest was includible in the decedent's gross estate. In that case, both halves can take a new basis.

The date-of-death value needs support. In probate, an appraisal is usually part of the estate's records. Under Probate Code section 8902, the probate referee appraises the property in the inventory other than what the personal representative appraises, except as otherwise provided by statute. Outside probate, families commonly rely on a date-of-death appraisal. Where an estate tax value was finally determined, 26 U.S.C. § 1014(f) can cap the basis at that value. A CPA or enrolled agent reviews the basis figure before it goes on a return.

Federal Reporting: Schedule D, Form 8949, and the 1099-S

Gain is the amount realized over the adjusted basis, under 26 U.S.C. § 1001(a). Each sale is entered on Form 8949, and the totals carry to Schedule D. The IRS FAQ on gifts and inheritances says that if there is a filing requirement, the sale is reported on Schedule D and/or Form 8949. It also says the gross proceeds count toward whether a return must be filed.

Holding period matters for capital gains. A heir who sells within a year of the death is not penalized for the short holding period. Under 26 U.S.C. § 1223(9), a person whose basis is set under section 1014 and who sells within 1 year after the death is treated as having held the property for more than 1 year. IRS Publication 559 says inherited capital assets produce long-term gain or loss regardless of how long they were held.

In plain terms, the Form 8949 line for an inherited house records:

• a description of the property;
• the date acquired, which is often entered as "inherited" or the date of death;
• the date sold;
• the proceeds;
• the basis;
• the resulting gain or loss.

The proceeds figure usually comes from Form 1099-S, the information return reporting gross proceeds from a real estate sale. The person closing the transaction, typically the escrow or title company, issues it.

If an estate or trust made the sale and is still open, it may report the sale on its own fiduciary return, not each heir. Publication 559 notes that a residence sold by the personal representative in the course of administration is generally a capital asset held for investment. The gain is subject to federal capital gains tax. The rate depends on the filer, which a CPA or enrolled agent can address.

California Reporting and the FTB: What the State Requires

California's income tax return picks up the same sale. The basis that starts the federal calculation is generally the starting point for the state return too. For a sale, the state question is income tax on any gain, reported to the FTB.

California does not follow every federal rule, so state and federal figures can differ in some situations. A CPA or enrolled agent who prepares California returns reviews whether any difference applies.

When an estate or trust is the seller, the FTB's Estates and trusts page (last updated 02/24/2026) lists when a return may be needed. For an estate, the executor may have to file if any of these apply:

• the decedent was a California resident at death;
• gross income is over $10,000;
• net income is over $1,000;
• the estate has California-source income;
• income is distributed to a beneficiary.

The same page lists separate tests for trusts. It also names Form 541, the California Fiduciary Income Tax Return. That return is used to report estate or trust income, report income distributed to beneficiaries, file an amended return and claim withholding.

California Real Estate Withholding: Form 593

Withholding is a prepayment, not an extra tax. It is credited toward California income tax the seller may owe.

Under Rev. & Tax. Code section 18662, the buyer, called the transferee, is generally required to withhold 3 1/3 percent of the sales price. The rule applies when a covered transferor disposes of California real property. A seller may instead elect to have withholding based on an amount the seller certifies in writing under penalty of perjury. That amount cannot be less than the gain multiplied by the rate the section specifies.

The statute lists situations where no withholding is required, including these:

• The sales price is $100,000 or less.
• The real estate escrow person has not given the buyer written notice of the withholding requirement. This exception does not apply to an intermediary or accommodator in a deferred exchange.
• The seller is a bank acting as trustee, other than a trustee of a deed of trust.
• The buyer relies in good faith on the seller's written certificate. The certificate states, under penalty of perjury, that the property is the seller's or decedent's principal residence within the meaning of Section 121 of the Internal Revenue Code. The statute lists other certifications as well, such as that the sale will produce a net loss or a gain not required to be recognized.

The decedent's-residence certification often matters for an inherited home. Whether it fits a given sale is a question for a CPA.

Escrow sends any amount withheld to the FTB. The seller, or the estate or trust, claims it as a credit on its California return. The FTB's page lists claiming withholding as one use of Form 541. A real estate escrow person generally may not charge for complying with this rule unless it provides "assistance." Even then, the fee may not exceed $45.

California Property Tax and Proposition 19: The Reassessment Question

Property tax is a separate subject from the income tax return. The county assessor sets it each year, and it raises its own questions after a death.

Under Rev. & Tax. Code section 60, a change in ownership is a transfer of a present interest in real property, including its beneficial use. The interest must be worth substantially the same as the fee interest. A transfer at death is generally one, and so is a later sale.

Under Rev. & Tax. Code section 480, a change in ownership statement must be filed after a death. Who files and when depends on how the property passes:

• In probate, the personal representative files it before or when the inventory and appraisal is filed.
• In other cases, including a trust, the trustee or the transferee files within 150 days after the date of death.

Under Probate Code section 8800, the inventory and appraisal is due within four months after letters are first issued to a general personal representative. The court may allow further time that is reasonable.

For transfers on or after February 16, 2021, Rev. & Tax. Code section 63.2 governs the parent-child exclusion from reassessment. The section also covers a grandparent-grandchild transfer if all of the grandchild's parents who are the grandparents' children, other than stepparents, have died.

The exclusion requires several things:

• the home was the transferor's principal residence;
• it becomes the transferee's principal residence within one year of the transfer;
• the transferee files for the homeowners' or disabled veterans' exemption within a year;
• a claim is filed with the assessor.

Value above a set limit is still added to the taxable value. The State Board of Equalization publishes the current figure.

A claim is due within three years after the transfer, or before a transfer to a third party, or before an eligible transferee stops occupying the home, whichever is earliest. It is also timely if filed within six months after a notice of supplemental or escape assessment is mailed. When the house is sold rather than lived in, the exclusion generally does not carry to the buyer. The county assessor's office handles exclusion claims.

When Multiple Heirs Own the Property Together

Each co-heir reports their own share of the gain or loss, in proportion to their ownership interest. Each co-heir's basis is that same share of the date-of-death value. For example, consider a hypothetical in which three siblings each inherit one-third. Each sibling's basis is one-third of that value, and each reports one-third of the proceeds.

Can one heir sell just their part? A co-heir generally cannot sell the whole property without the others' agreement, but may be able to sell their own fractional interest. When co-owners cannot agree, California's partition statutes provide a legal process. That is a matter for an attorney who handles partition cases.

Paperwork does not always match the split. A single Form 1099-S may be issued in one heir's name or the estate's name even when several people share the proceeds. The escrow company's practice and how title was held decide that. A CPA can show how each heir reports only their share. Sorting this out while also coordinating with siblings can feel like a second job. Writing down the ownership shares before closing usually saves a round of questions later.

What to Gather Before Filing: Documents and Professionals

Assembling a file now makes tax season quieter.

The documents a preparer usually asks for:

• The final closing or settlement statement. It shows the gross price, commissions and closing costs.
• The date-of-death appraisal or other support for value. This includes any probate referee appraisal.
• The Form 1099-S from the escrow or title company.
• Any withholding paperwork from escrow.
• The estate's or trust's taxpayer identification number, if the estate or trust was the seller. This is a number the IRS issues to the estate or trust, separate from the decedent's Social Security number.
• Any Schedule A to Form 8971, if an executor provided one. The IRS FAQ explains that this can require a basis consistent with the estate tax value.

Different professionals handle different parts of this:

• A CPA, an enrolled agent or a tax attorney handles basis, federal and California returns, and withholding credits.
• The county assessor's office handles change in ownership statements and the Proposition 19 exclusion claim.
• The estate's or trust's attorney handles authority to sell and open estate matters. If the estate is still in probate, that includes how selling inherited property during probate works.

Escrow handles the withholding at closing. The seller supplies any certification but does not send the withheld amount to the FTB.