Selling an Inherited House in California: Property Sales Tax & More

If you’re selling an inherited house in California, there are tax considerations to think about, and if you’ve inherited a share in a house the matter can be complicated. Furthermore, the sale of a home with family history can be an emotional journey, which makes proceeding with care important.

While you have options when it comes to selling a house that was passed down to you, selling to a California real estate investor (like us) for cash is the simplest, fastest approach, and because we buy properties as is, you can leave the fixing up to us.

What is Inherited Property?

Inherited property is real estate that you receive from someone who has passed away, either through a will or trust or through the laws of intestacy if the deceased did not have a will. This can include a house, a condo, a piece of land, or any other type of real estate.

Inheriting property can be a complex process, both emotionally and legally. There are often many details to sort out, including probate court proceedings, potential estate taxes, and of course, deciding what to do with the property itself. Many people choose to sell inherited property, which is why understanding the tax implications and legal requirements in California is crucial.

Selling Inherited Property in California: A Comprehensive Guide

What happens when you inherit a house in California?

In the State of California, you won’t owe any tax if you inherit a property, but if you sell, you’ll likely owe capital gains tax on any value that exceeds what the house was worth at the time of your relative’s passing. 

Tax concerns become more complicated from here.

Your options include selling the house on your own, going through a realtor, and selling to a real estate investor. If you choose the real estate investor, you can expect to sell your house quickly for a fair cash offer and bypass the many complications that usually go with selling a home.

Looking to Sell Your Inherited House Fast?

If selling inherited property in California quickly is a priority right now, you need to know a few basics. You may feel an emotional connection to the property, and you may have no idea how or where to start.

In fact, it’s not unusual for people who inherit from a family member to feel at a loss in terms of what comes next. While others simply don’t have the time or energy to maintain and keep an additional property.

At SoCal Home Buyers, we understand that many people who receive something as personal as a home are torn about what comes next.

We’re professional real estate investors who have the knowledge, experience, and, most importantly, the compassion to help you get up to speed on everything you need to know about selling your home without all the complications of listing it or hiring a realtor. 

If you’re ready to consider alternative options, we’re here to help guide you.

Here’s what our client Isabel W. said after selling her inherited home with us: 

Is There a Time Limit on Selling Inherited Property?

No, there’s no time limit on selling. Not everyone is ready to sell so soon however, and this is understandable. Once probate is settled and you’re named the legal owner, whether you bought the property or inherited it, the timing is up to you.

Should I Sell My Inherited House or Rent It Out?

Is it better to sell or rent an inherited house? The answer depends. Whether to sell or rent, both come with pros and cons, but you do have a few options. 

The pros of selling an inherited home 

1. You can go through a real estate agent 

Working with a real estate agent who has considerable experience with inherited homes comes with the following advantages:

• The realtor will help you avoid conflicts with any additional heirs.
• The realtor will help you make the right decisions for you throughout the sales process — with an eye toward the big picture, which is maximizing your return.
• The realtor will help you smoothly navigate the complex process of selling a house that was passed down.
• The realtor has the insight to help you complete the process as effectively and efficiently as possible — in light of the many complications that often arise.

By listing your home with a realtor, you leave the complicated sales process in their knowledgeable hands.

2. You can sell the home yourself 

You also have the option of selling the home yourself, which is referred to as For Sale by Owner (FSBO). 

In fact, the National Association of Realtors says that a full 10% of home sales in the United States were FSBO in 2021, which is up from 7% in 2020.

Selling your house without a Realtor has Pros and Cons of its own, however. 

3. You can sell to a real estate investor 

If you’re in the market to sell the house quickly and efficiently, working with a real estate investor like SoCal Home Buyers is a great way to go about it. We’ll take care of all the details, ensure that you get the best cash offer we can make on your property, and speed up the process considerably. 

You’ve lost a loved one, and the strain of dealing with the grief and the hassle of selling property at the same time can make the ease of working with a real estate investor an excellent option.

The cons of selling an inherited home

The cons of selling an inherited home include all the following:

• There are significant tax implications to consider, including capital gains tax.
• Receiving a property from family can feel like an emotional tug of war whether to keep it in the family or to sell it.
• You have to consider market fluctuations and whether it’s a good time to sell.

The pros of renting your inherited property

Some people who inherit property are very interested in keeping it in the family or simply don’t want to sell, and there are advantages and disadvantages to renting the property out.

Let’s consider the pros:

• By making the property a rental, you turn it into an investment property that can become a steady source of income.
• You keep the property in the family.
• You avoid the challenges associated with convincing multiple heirs to sell their share.
• Because California has no inheritance tax, renting the home out allows you to avoid the tax burden associated with selling it.

The cons of renting your inherited property

As a rental property owner, you’ll also face considerable responsibilities that can translate to disadvantages:

• You will be responsible for ensuring the property is up to code as a rental.
• You’re responsible for doing all the home maintenance and repairs as they arise.
• You’re responsible for addressing any issues your tenants encounter, which can end up being a lot more work than you bargained for.
• If you later decide that it’s best to sell the rental property, you may have a tenant lease to deal with, and selling rental property in California comes with tax complications of its own.

Do I Have to Report the Sale of Inherited Property?

You do have to report the sale of any property received to the IRS for the year that you sell it—there are taxes associated with any profit you make above the property’s market value when you received it.

The tax liability related to inheriting property in California is naturally complicated, which makes proceeding with professional guidance a good plan.

If your home sale results in significant gains, the IRS will expect a portion of these proceeds to be reported as taxable income. For instance, inherited properties with a market value exceeding $1 million in 2022 may have unique tax considerations that require careful attention.

Do You Have to Pay Taxes on Inherited Property that You Sell?

You may have to pay income tax on the sale of the property. This will depend on whether or not you turn a profit on the sale that exceeds its fair market value at the time your loved one passed away. Other deductions that can be taken before profit is calculated include:

• The cost of any home improvements you made
• The selling costs, such as the commission to your real estate agent

This establishes how much profit or loss you had on the sale of your property, which are called capital gains and capital losses.

If you took a loss, you won’t owe any income tax. If you made a profit, however, you’ll be taxed on the proceeds from the sale according to how long you’ve owned the property.

• Less than a year: If you held on to the house you received for less than a year, you’ll be taxed at the same rate you are on your regular earnings, which is known as short-term capital gains tax.
  
• More than a year: If you kept the property for more than a year, the profit you made will be taxed at a considerably lower rate, classified as long-term capital gains, and you may qualify for a tax exclusion that reduces what you owe on the sale. If you’ve lived in the home for two or more years as your primary residence, you might be able to exclude a large portion of the profit from taxes.

How Much Tax Do You Pay When You Sell an Inherited House?

When you receive the house, you typically aren’t taxed until you sell it — only then will you owe on any profit. This involves a step-up cost basis, which means you will be taxed only on the increase from the property value at the time you inherited it.

The taxes on selling an inherited house

When you earn money or your assets increase, the government generally expects you to pay tax on your gains, and inheriting a home in California is no exception.

Depending on where you live in the United States, state taxes, estate taxes, and inheritance taxes can apply, but this isn’t the case in California.

There are, however, other taxes to consider:

California property inheritance tax 

So, how much is the inheritance tax in California? You’ll be glad to learn that there’s no inheritance tax on real estate in California. While this is one concern you can cross off your list, it’s important to note that inheritance taxes vary by state, and if you’re a California resident who receives a property in one of the states that does impose an inheritance tax, it will apply to you.

Proposition 19 & inherited property taxes

California’s Proposition 19 significantly impacts property taxes on inherited homes, making it a crucial consideration when deciding whether to keep or sell. Here’s how it works:

• Keeping the Tax Base (If You Qualify): If you inherit a home and move in, using it as your primary residence, you might be able to keep the existing, lower property tax rate. However, specific rules apply, so check with a tax professional. This can be a big incentive to keep the home.
• Reassessment Upon Sale or Rental: If you sell or rent the inherited home, it will likely be reassessed at its current market value. This usually means a significant property tax increase for the new owner (if sold) or for you (if you later move in after renting). This potential tax hike is a major factor in deciding whether to sell or keep the property.

Capital gains tax on inherited property California

If you decide to sell the house, you will need to address the matter of capital gains tax, which comes into play only if you make a profit on the sale. You should also factor in any property taxes and ensure that your tax bill is settled before proceeding. When it comes to paying taxes on selling inherited property in California, this is your primary concern.

Capital gains refer to profit.

If the sale price you receive on the sale exceeds the value of your inherited home at the time that your relative passed, capital gains tax may apply to your profit.

This is known as the step-up basis, and it allows you to subtract specific costs — such as those related to improvements and sales expense — from your profits before they’re taxed.

California’s Capital Gains Tax Rates

Unlike federal capital gains tax rates, which top out at 20%, California treats capital gains as regular income. This means that any profit you make from selling your property is taxed according to your individual income tax bracket, with rates ranging from 1% to 13.3%. This can be a significant difference compared to federal rates and is a key factor for sellers to consider, even when dealing with mid-range properties. Because of these higher potential tax rates, it’s essential to factor in capital gains taxes when estimating your net proceeds from a sal

How Do I Avoid Capital Gains Tax on Inherited Property in California?

You may want to avoid paying capital gains tax altogether.

You have three options:

1. Live in the house 

If you live in the house you inherit for at least two years prior to selling it in California, you’re off the hook for both federal and state capital gains tax in most situations. If making the home you received your main residence works for you, it can be very helpful financially.

2. Rent out the house 

Another option when it comes to avoiding capital gains tax is turning the home into a rental, which bypasses the issue of capital gains tax and allows you to benefit from the rental income.

3. Sell your property as is 

“I want to sell my house fast,” you say, “but don’t know how to make that happen.”

At SoCal Home Buyers, we not only hear you, we’re here to help. We buy houses as-is, which means you won’t need to make repairs, tidy the place for showings, or address any of the other hassles that go with selling the home on the open market. 

Selling a house as is to us helps take all the pressure off you. We streamline the process by conducting our own inspections and making our best offers on the spot, without the hassles, costs, and repairs required when listing, which makes selling about as easy as it can get. 

How to Sell Inherited Property

When it comes to how to sell an inherited house in California, you have several options. Let’s take a closer look at each possibility.

1. Reach out to a professional real estate investor 

If you’re considering selling, you naturally want the process to go as smoothly as possible. At SoCal Home Buyers, we know how challenging selling can be and are here to help. 

Give us a call or contact us online, and we’ll discuss your property with you, send out our in-house inspector, and make a fair cash offer for your property just the way it is — it’s as easy as that. 

There’s no need to clean or fix the place up, to endure the hassle of listing on the open market, or to do any of the rest. We offer a one-and-done process that allows you to focus on what comes next.

Selling your home to a real estate investor for cash can be an ideal choice, especially when any of the following apply:

• You don’t live near where the inherited property is located and would like to avoid the inconvenience of a long-distance responsibility.
• The property isn’t in ideal condition for sale.
• You’re interested in skipping the hassle of hiring a realtor and having to list it.

2. Sell the inherited house yourself

Many people choose to sell their homes themselves, and it can be a decent option.

You should know, however, that the amount you’re able to sell for will likely be less than it would be if you worked with local agents who know the market.

The legal process for selling a home on your own is complicated, which makes this an option you shouldn’t jump into without careful consideration.

The basic steps when it comes to selling the house yourself — or for sale by the owner (FSBO) — include the following:

• Pricing the property: this involves paying attention to market trends, doing neighborhood research, and determining an appropriate sale price for the home sale.
  
• Marketing the property: which means skipping the multiple listing service (MLS) that only Realtors can use.
• Holding an open house.
• Negotiating: Negotiate a fair price with any interested parties, including addressing matters like closing costs, buyer stipulations, and outstanding mortgage payments.
  
• Paperwork: Process the extensive paperwork involved, including ensuring the mortgage documents are appropriately addressed.
  
• Closing: Successfully navigate the closing and escrow.

When you sell yourself, it’s important not to lose sight of all the details you’re responsible for managing — and there are a lot of them.

3. Work with a real estate agent

Working with an agent is a safe option. You can count on your agent to handle the details and keep things moving in the right direction. There are, however, significant sales expenses involved, and the process is generally quite lengthy.

4. Sell the inherited property to family members

Inheriting a house with siblings tends to significantly complicate the matter of selling it. For example, you may want to sell, but if you and your siblings can’t come to an agreement on the matter, it puts you in a bind.

Forcing the sale can lead to bad blood between family members at an already difficult time. This generally makes reaching a mutually acceptable agreement worth the effort.

Selling your share of the property to a sibling may be a good compromise.

What Documents Are Required for Selling Inherited Property?

Selling inherited property can be complex, requiring careful documentation for the transfer of ownership. If you’re inheriting a house in California, having the necessary documents ready can simplify the process. The way the property is transferred to you will determine exactly which documents you need to sell the property.

1. Living trust 

The most straightforward path is through a living trust, which requires no probate court approval. In fact, the living trust document makes the property yours to sell whenever you choose to do so.

2. Transfer-on-death deed 

A transfer-on-death deed is a document that allows ownership of a house to pass directly from the original owner to someone else without going through the probate process.

The transfer-on-death deed fills the same role that a living trust does, but it does not have as many applications. 

When a home is a person’s primary asset, a transfer-on-death deed tends to be the right choice, while a living trust is often better suited to someone with a more considerable estate.

3. Mortgage records 

As the new owner of a property, you need to understand the status of the mortgage. You’ll need to continue paying the mortgage balance now that it has been passed to you.

If there are any lingering financial concerns related to the mortgage, now is the time to address them. It’s important to determine the mortgage balance at the time of inheritance and agree on how to proceed with any co-owners to avoid future disputes.

To obtain the mortgage documents from the mortgage company, you’ll need to provide the appropriate documentation that identifies you as the new owner through inheritance.

4. Death certificate 

If you go through probate, you’ll likely need your loved one’s death certificate to start the process. Copies are available from the California Department of Public Health – Vital Records.

5. Copy of the Probated Will

If the property comes to you through the probate process, it means that your loved one left you the property in their will or that you received it as a result of California’s laws of inheritance — if there was no will or if the will did not address the property.

This is generally the most time-consuming, least direct, and most costly method. 

The Probate process refers to the court process in which the assets of someone who’s died pass to others. If the decedent — or the person who passed away — did not name an executor of their will, the court will appoint one to help guide the probate process, allowing you to inherit the property, including:

• Assessing the decedent’s assets
• Paying off the decedent’s outstanding debts and liabilities
• Distributing what’s left to named beneficiaries — or in accordance with California’s laws in those instances when the will fails to address specific assets or when there is no will

Probate can take a considerable amount of time, but once it’s finalized, you’ll need a copy of the probated will in order to sell the property you received. You can obtain this document from the court in the California County where your loved one last lived.

Sale of Inherited Property When More Than One Party Is Involved

If you’re not the only owner of the property you received and you’re interested in selling, it complicates the matter considerably. Ultimately, you’ll all need to agree to sell before the property is sold, and reaching an agreement can be a challenge.

In some cases, the property must be sold to resolve financial obligations or fulfill terms outlined during probate. Selling a property with multiple owners requires more caution and care, but it can be done.

Related concerns

Each of the following can become a sticking point in the sales process when multiple people receive the property involved:

• One of you may not be ready to let go of the property for sentimental reasons when the rest of you have made your peace with the idea.
• Agreeing to an asking price or to an offer becomes more complicated.
• Simply coordinating the sale can be a challenge.
• Selling a property together as a group requires considerable organization and effort.
• The more people there are involved in the sale, the more potential there is for things to go wrong.

Making it work

If you believe that the home you received with other people should be sold, there are steps you can take to help get your co-owners on board.

1. A cash offer from a real estate investor 

A great way to make your case is by letting the other owners know how easy the process can be if you sell the house for cash to a professional real estate investor.

Sharing all the following benefits may help sweeten the deal for any holdouts among you:

• Real estate investors buy properties as is, which means you won’t need to make costly repairs or put a lot of effort into selling.
• Real estate investors work quickly — making fair cash offers on the spot after conducting property inspections — which speeds the process up immensely.
• Real estate investors make the process painless and profitable for sellers as possible, which — in turn — allows them to make deals quickly and keep their investments moving forward.
• Real estate investors have the insight, experience, and resources to accurately assess a property’s value and to make well-considered cash offers that often make selling less difficult.
• Real estate investors take the question marks out of selling the home. They accept all the risk while you proceed without the burden and responsibility of co-owning a property received, which could be more than any of you bargained for.

Taking a cash offer to someone who owns an inheritance with you could help you make your best case without saying a word.

2. The real estate agent route 

Working with a Realtor generally takes significantly longer and is more costly than other approaches. Having an experienced agent on your side, however, helps to ensure that all the details are taken care of and that the sale will proceed as smoothly as possible.

Any holdouts in your group may be comforted by the idea of bringing in a Realtor, which can work to your advantage.

A point you may want to share with your co-owners is that houses sold by Realtors — as opposed to houses sold by their owners — statistically bring higher prices.

3. FSBO 

The co-owners of the property may be interested in cutting out the middleman and selling the place yourselves, which is referred to as for sale by the owner.

This is the most challenging approach, but it does keep things directly in your collective hands, which may inspire those with lingering doubts to get on board.

Is Inheriting Rental Property in California Any Different than Receiving Residential Property?

If your inheritance is a rental property — or investment property — it can indirectly affect the way you’re taxed.

1. Using the property as an investment 

You don’t owe any taxes on a property that you receive until you decide to sell it.

If you choose to sell the rental, the only potential tax you face is on any profit you make, which means any amount that exceeds the value of the rental at the time of your loved one’s death, the cost of repairs and maintenance that you put into it, plus any sales expenses such as the realtor’s commission that you paid.

You’ll be required to pay capital gains tax on this profit, and the amount will depend upon the amount of time you keep it before selling.

If you owned the property for less than a year, you’ll be taxed at the same rate that your income is. If, however, you kept the rental property for more than a year, you’ll be taxed at a set rate that is based on your tax bracket, which will be considerably less than your income tax rate. 

If you continue to use the property that you received as a rental property, you’ll owe tax on the income it generates. In the United States, nearly all income is taxed, and rental income is no exception.

2. Using the property as a residence

if you don’t use the investment property that you receive as a rental, you won’t owe any tax unless you choose to sell, and at that point you’ll be taxed on your capital gains — or any profit you make — as described above. This is true whether you make the property your main residence, you use it as your extended family’s vacation home, or it stands empty.

You should know, however, that if you make the investment property your main residence for at least two years before you sell it, you’re likely home free in the tax department and won’t be required to pay any capital gains tax.

How to Prepare Your Inherited Property for Sale?

The condition of the inherited property can significantly impact its market value and appeal to potential buyers. Before listing the property, it’s crucial to assess its condition and make necessary repairs or upgrades.

1. Assess the Property

• Conduct a thorough inspection: Identify any necessary repairs, such as plumbing or electrical issues, roof damage, or structural problems.
• Consider necessary updates: Outdated kitchens, bathrooms, or flooring can deter buyers. Evaluate whether updates would increase the property’s value and attract more offers.
• Obtain professional inspections: Consider hiring a professional home inspector to identify any hidden issues that may not be apparent to the naked eye.

2. Prepare the Property for Sale

• Clean and declutter: A clean and organized home is more appealing to buyers. Remove personal belongings, declutter living spaces, and deep clean the entire property.
• Make necessary repairs: Address any issues identified during the inspection. This may include fixing leaky faucets, patching holes in walls, or replacing broken appliances.
• Enhance curb appeal: First impressions matter. Improve the property’s exterior by mowing the lawn, trimming bushes, and adding fresh landscaping.
• Stage the home: Staging can help buyers visualize themselves living in the space. Consider hiring a professional stager to arrange furniture and décor in a way that highlights the property’s best features.

Investing time and effort in preparing the property for sale can result in a quicker sale and a higher selling price. It also demonstrates to potential buyers that the property has been well-maintained.

Closing the Sale

Once you’ve accepted an offer on the inherited property, it’s time to move forward with closing the sale. This involves finalizing all the legal and administrative details to transfer ownership to the buyer.

1. Escrow Process

• Open escrow: An escrow account is established to hold funds and documents related to the sale.
• Complete necessary paperwork: This includes the purchase agreement, title report, and any disclosures required by California law.
• Satisfy contingencies: The buyer may have contingencies in their offer, such as obtaining financing or a satisfactory home inspection. These must be met before the sale can close.

2. Final Walkthrough

• Buyer’s final inspection: The buyer will typically conduct a final walkthrough of the property to ensure it’s in the agreed-upon condition.

3. Closing Day

• Sign closing documents: Both the buyer and seller will sign all necessary documents to finalize the sale.
• Funds are disbursed: The buyer’s funds are transferred to the seller, and the seller receives the net proceeds from the sale.
• Title is transferred: The title company records the transfer of ownership with the county.

4. Post-Closing

• Cancel utilities and insurance: Contact utility companies and insurance providers to cancel services and policies related to the property.
• Forward your mail: Set up mail forwarding to your new address.

Sell Inherited House with SoCal Home Buyers

At SoCal Home Buyers, we’re well aware of how confusing selling the property can be, and we understand why you might be motivated to do so quickly. We’re a family-owned real estate investment company with an impressive track record for helping people in situations just like yours sell their properties with the confidence of knowing they’re in good hands.

The process involves just a few simple steps:

1. Request your fair cash offer by calling 951-331-3844 or filling out the short form below.
2. We’ll call you to discuss your property and schedule a one-time inspection so we can offer you the highest amount possible.
3. We’ll make you a fair cash offer on your home at your inspection. If you like our offer, you can consider your home sold!
4. Simply choose your closing date, and we’ll close on the date you need. You can receive payment via check or wire transfer. It’s that simple!

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