Guides

Inherited Property Capital Gains Tax

Property inherited in San Diego, CA generally receives a step-up in basis under Internal Revenue Code Section 1014, meaning the heir's basis is generally reset to the property's fair market value as of the date of the original owner's death rather than carrying over the decedent's original purchase price and accumulated depreciation. This generally eliminates most or all of the capital gain that had built up during the decedent's ownership, so an heir who sells inherited property relatively soon after receiving it often owes little or no capital gains tax, since the taxable gain is generally measured only against the stepped-up value rather than decades of appreciation. California does not impose a separate state estate or inheritance tax, so heirs generally do not face an additional state-level tax simply for inheriting the property, though property tax reassessment under California's Proposition 19 is a separate consideration for heirs who intend to keep and occupy an inherited home. One detail that specifically matters in California and other community property states is how the step-up applies to property owned jointly by a married couple. Under Internal Revenue Code Section 1014(b)(6), community property generally receives a full step-up in basis on both halves of the property when the first spouse dies, not just the deceased spouse's fifty percent share, which is more generous than the treatment typically available in common law states where only the decedent's half generally steps up. This means a surviving spouse in San Diego, CA who inherits a jointly held community property asset can generally sell it with a fully reset basis equal to the property's value at the date of the first spouse's death, which can meaningfully reduce or eliminate gain compared to non-community-property states. Once the step-up is applied, any further appreciation between the date of death and a later sale is generally taxed as a normal capital gain, and if the heir held the inherited property for investment or business use, that later sale can generally still be structured as a 1031 exchange to defer tax on that post-inheritance appreciation. Heirs who plan to keep an inherited San Diego, CA property as a rental rather than selling it immediately should generally get a qualified appraisal near the date of death to document the stepped-up basis clearly, since that valuation generally becomes the foundation for all future depreciation and gain calculations. Educational content only. This is not tax, legal, or investment advice, and heirs should confirm basis, valuation, and any exchange planning with a qualified tax advisor and estate attorney.