Sell the house now, or let the kids inherit it?
It is the question I get most from longtime California homeowners, and it does not have one answer. Sometimes the math says sell. Very often it says wait. This page shows you the machinery — the income-tax basis, the property-tax base, and the family conversation nobody puts on a spreadsheet — so you and your CPA can run your own numbers instead of guessing.
This is three questions wearing one coat
People ask it as a single question — sell or hold? — and then get stuck, because it is really three questions that pull in different directions. Separate them and the decision gets a lot clearer.
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The income-tax basis question
If you sell, you pay tax on the gain above your §121 exclusion. If you hold until death, the basis resets to fair market value and that lifetime appreciation is never taxed as income. On a home bought decades ago, this is usually the biggest single number in the comparison — and it points toward holding.
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The property-tax base question
Your Prop 13 assessed value is probably a small fraction of what the house is worth. Since Prop 19, that low base only survives to your children if one of them actually moves in within a year — and even then it is capped. This question frequently points the other way.
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The question that is not about money
Does anyone in the family actually want this house? Can you afford to keep it? Are the stairs still a good idea? Will one child living there and three children not living there start a fight after you are gone? No tax rule answers these, and they decide more of these cases than the tax rules do.
Said plainly, up front: I am a real estate broker. I am not a CPA and not an attorney, and nothing here is tax or legal advice. This page exists so you walk into your CPA's office and your estate attorney's office knowing what to ask. Those two professionals get the final word on your situation — and I am happy to sit at that table with them.
One more honest note: I get paid when a house sells. So take it seriously when I tell you that for a lot of the people who ask me this question, the right answer is don't sell yet. If a page like this only ever concluded “sell now,” it would not be worth reading.
What the step-up in basis is actually worth
Under IRC §1014, when property passes at death, its income-tax basis resets to fair market value on the date of death. Every dollar of appreciation that happened during your lifetime escapes income tax entirely. If the children sell shortly after, near that date-of-death value, there is very little gain left to tax.
On a California home bought in the 1970s or 1980s, that is not a rounding error. It is frequently the largest number in this whole decision.
California's community property advantage
This one is specific to states like ours and it catches people by surprise. Under IRC §1014(b)(6), when a married couple holds the home as community property, the full fair market value becomes the basis of the entire property at the first spouse's death. A 100% step-up, not 50%. Joint tenancy steps up only the decedent's half.
IRS Publication 523 prints the joint-tenancy figures below; the community-property column applies the separate rule in §1014(b)(6) to the same numbers. Side by side, the size of it is clear:
| How title is held | Adjusted basis before death | FMV at death | Survivor's new basis |
|---|---|---|---|
| Joint tenancy with right of survivorship | $50,000 | $100,000 | $75,000 |
| California community property | $50,000 | $100,000 | $100,000 |
How your deed reads is consequential. That is a question for your attorney or CPA — ask it before anything else happens.
An illustrative example — not your numbers
Illustration only. Made-up figures, chosen to show the arithmetic. Your basis, your income, your rate and your assessed value are all different.
A married couple bought in 1978 for $85,000 and put $115,000 of documented capital improvements in over the decades — a new roof, an addition, a re-piped house. Adjusted basis: $200,000. The home is worth $1,800,000 today. Their other taxable income this year is $90,000. Assume selling expenses of 6%.
| If they sell now | Amount |
|---|---|
| Sale price | $1,800,000 |
| Less selling expenses (commission, escrow, title, credits) at 6% | − $108,000 |
| Amount realized | $1,692,000 |
| Less adjusted basis (purchase price plus documented improvements) | − $200,000 |
| Gain | $1,492,000 |
| Less §121 exclusion, married filing jointly | − $500,000 |
| Taxable gain | $992,000 |
| Federal capital gains tax (2026 brackets, gain stacked on $90,000 of other taxable income) | $170,880 |
| California income tax at the top marginal rate of 12.3% (an upper bound) | $122,016 |
| California 1% mental health services tax on taxable income over $1,000,000 | $820 |
| Net Investment Income Tax — 3.8% of the lesser of net investment income ($992,000) or modified AGI over the $250,000 threshold ($832,000) | $31,616 |
| Estimated income tax on the sale | $325,332 |
The federal figure comes from real brackets, not a flat rate: with $90,000 of other taxable income, $8,900 of the gain falls in the 0% band (up to $98,900), $514,800 in the 15% band (up to $613,700), and $468,300 in the 20% band. The California line uses the state's top marginal rate as a ceiling — the actual bill runs through California's graduated brackets and will usually be lower. Your CPA computes it properly.
If instead they hold and the children inherit, the basis resets to fair market value at the date of death. If the children then sell near that value, that roughly $325,000 of income tax simply does not happen. That is the case for waiting, and it is a strong one.
Now the other side of the ledger.
Prop 19 changed what your children inherit
Before February 16, 2021, the parent-child exclusion was generous and nearly automatic: children inherited the house and inherited the low Prop 13 tax base with it, whether they lived there or rented it out. That is over. Under R&TC §63.2 and Rule 462.520, for transfers on or after 2/16/2021, three things are now true.
A one-year occupancy gate
A child must make the home their principal residence within one year of the transfer and file the homeowners' exemption (BOE-266) or disabled veterans' exemption (BOE-261-G). The one-year move-in is a hard eligibility gate with no late relief. Filing the exemption late is different — that costs retroactivity, not eligibility.
A cap on the exclusion
Even when a child does move in, only so much is excluded: the factored base year value plus $1,044,586 for transfers dated February 16, 2025 through February 15, 2027. Anything above that gets added to the taxable value.
No exclusion for rentals
An inherited home kept as a rental is reassessed at full market value. No exclusion at all. For families who pictured keeping the house and renting it out, this is usually the fact that changes the plan.
The arithmetic, and the Board of Equalization's own example
Rule 462.520(c)(1) works in three steps: excluded amount = factored base year value + $1,044,586. Excess = fair market value at transfer − excluded amount, floored at zero. New taxable value = factored base year value + excess.
Here is the BOE's published illustration, which uses the $1,000,000 figure that applied to transfers from 2/16/2021 through 2/15/2023:
| BOE example | Amount |
|---|---|
| Factored base year value | $300,000 |
| Fair market value at transfer | $1,500,000 |
| Excluded amount ($300,000 + $1,000,000) | $1,300,000 |
| Excess ($1,500,000 − $1,300,000) | $200,000 |
| New taxable value ($300,000 + $200,000) | $500,000 |
The same home, for a death occurring in the current window, uses $1,044,586 instead:
| Same home, transfer dated 2/16/2025–2/15/2027 | Amount |
|---|---|
| Factored base year value | $300,000 |
| Fair market value at transfer | $1,500,000 |
| Excluded amount ($300,000 + $1,044,586) | $1,344,586 |
| Excess ($1,500,000 − $1,344,586) | $155,414 |
| New taxable value ($300,000 + $155,414) | $455,414 |
The cap is a cap, not a cliff. Going over $1,044,586 does not disqualify the transfer — it just means the excess gets added to the taxable value. A child who moves in is still far better off than a child who does not, even on an expensive home. In the example above, $455,414 versus $1,500,000.
Two more things worth knowing. The cap has moved twice already — $1,000,000 for transfers 2/16/21–2/15/23, $1,022,600 for 2/16/23–2/15/25, $1,044,586 for 2/16/25–2/15/27 — and the Board of Equalization re-indexes every two years, so the next change lands 2/16/2027. Because the date of death is the date of transfer, the figure that applies is the one in effect on the date of death, not the one that was current when the trust was drafted.
And the paperwork has its own clocks. The parent-child claim is BOE-19-P, due within three years of the transfer, or before transfer to a third party, or when an eligible transferee no longer occupies — whichever comes earliest. Grandparent-to-grandchild uses BOE-19-G and additionally requires that all of the grandchildren's parents who qualify as children of the grandparents be deceased as of the transfer date, with a stepparent son-in-law or daughter-in-law exception. Separately there is the change-in-ownership statement, BOE-502-D, due within 150 days when there is no probate (or filed with the inventory and appraisal if the estate is probated), and trustee notice under Probate Code §16061.7 and §16061.8. Those are walked through on the probate and trust sale page and in the surviving spouse guide, and the Deadline Clock will date them for you.
The same house, two paths
Neither column is the winner. Read down both and notice which rows matter most in your family.
| If you sell now | If the children inherit | |
|---|---|---|
| Income tax on the appreciation | Gain above the §121 exclusion — $250,000 single, $500,000 married filing jointly — is taxed: federal capital gains, California ordinary income, and possibly the 3.8% NIIT. On a long-held home this can be a six-figure number. | Usually the strongest argument for waiting. Basis resets to fair market value at the date of death under §1014. Lifetime appreciation escapes income tax entirely. In California, community property gets a full step-up at the first spouse's death. |
| Property tax base | Your Prop 13 base ends with the sale. But at 55+ you can carry the factored base year value to a replacement primary residence anywhere in California, up to three times, under Rule 462.540. | Usually the strongest argument against waiting. The base survives only if a child moves in within one year and files the exemption, and only up to the base plus $1,044,586. A rental is reassessed at full market value. |
| Control and flexibility | You choose the price, the timing, the condition and the buyer. The proceeds are liquid and available for retirement, care, gifts, or anything else. | The house and every decision about it pass to the children — often to several of them at once, who may not agree about any of it. |
| Timing risk | You take today's market, whatever today's market is. You know the number before you commit. | Nobody knows the date, the market on that date, the condition of the house by then, or what the rules and the cap will be. The BOE re-indexes every two years; the next change is 2/16/2027. |
| Carrying the property | Insurance, maintenance, property tax and deferred repairs stop being your problem. | Someone keeps paying for the roof, the insurance and the deferred maintenance — during your lifetime, and after. |
| Family considerations | Cash divides cleanly among children. And you are here to explain the decision, which is worth more than most people realize. | One child can move in and keep the tax base. The others cannot. Whether that is fair — and whether anyone actually wants to live there — is often the real decision. |
Depreciation warning that applies to the left column only: if the home was ever a rental or had a home office, depreciation allowed or allowable for periods after May 6, 1997 cannot be excluded under §121(d)(6) and is taxed at a maximum 25% rate. “Allowable” means it applies even if you never claimed the deduction.
When holding usually wins
I will say this as plainly as I can: for a great many longtime California homeowners, the right answer is don't sell yet. Holding tends to win when several of these are true at once.
- The gain far exceeds your §121 exclusion. The exclusion is $250,000 single and $500,000 married filing jointly, it is not indexed for inflation, and it has not moved since 1997. California home values have. When the gain is $1.5 million and the exclusion covers $500,000, the step-up is erasing a very large tax bill.
- A child genuinely will move in within a year and file the homeowners' exemption. Not “might.” Not “probably one of them.” When that is real, the family keeps both the step-up and most of the property-tax base, and holding is usually the clear winner.
- You do not need the equity. Retirement is funded, care is planned for, and the house is not the plan.
- The house still works for you. You can manage it, afford it, and get around in it — and moving would cost you more in quality of life than the tax math would return.
- The family agrees. Everyone has actually talked about it, out loud, and nobody is quietly assuming something different.
If that describes you, the honest recommendation is to do nothing about selling — and to spend the effort instead on the paperwork side: how title is held, whether the trust is current, whether the child who will occupy knows about the one-year clock and the exemption filing. That is where the money gets won or lost in your situation, and none of it involves listing the house.
When selling usually wins
And the other direction, with the same candor. Selling tends to win when one or more of these is true.
- No child will move in within a year. This is the big one. If nobody is going to occupy the house, the low property-tax base is lost either way — the reassessment happens at full market value when they inherit. Holding then preserves only the income-tax basis benefit, which has to be weighed against years of carrying costs, market risk, and the value of having the money now.
- The house is, or will become, a rental. An inherited home kept as a rental is reassessed at full market value with no exclusion. A rental also drags in depreciation recapture on the sale side. Families who plan to rent it out are usually better off selling, and that surprises people.
- The equity is needed. If the house is the retirement plan, or the long-term care plan, then a tax benefit that only pays off after death is the wrong thing to optimize. Money you need is worth more than tax you avoid.
- The property has become a burden. Stairs, a big yard, deferred maintenance, a roof and a furnace both due, a house too far from the people who help you. Holding a property that is wearing you down is not a tax strategy.
- The gain is at or near the §121 exclusion. If the exclusion covers most of the gain, selling now costs relatively little in tax, and the step-up is not worth much. In that case the tax argument for waiting largely disappears.
- You want to move, and stay in California. At 55+ you can transfer your factored base year value to a replacement primary residence anywhere in the state, up to three times (Rule 462.540), with the replacement bought or built within two years of the sale in either direction, claimed on BOE-19-B within three years in the county of the new home. On the value test, only the excess over 100%, 105% or 110% of the original's full cash value — depending on the timing — is added to your transferred base. Not the whole difference. See the Prop 19 guide.
- Health has already changed the picture. Under §121(d)(7), if you become physically or mentally incapable of self-care and you owned and used the home as your principal residence for at least one year of the five-year period, time in a state-licensed care facility counts toward the two-year use requirement — giving the full exclusion, not a prorated one. Families routinely assume the exclusion is gone once a parent moves out. Often it is not, and that changes the sell-now math substantially.
The Cost Basis Worksheet
Fillable. Every documented improvement lowers your taxable gain — and this shows you exactly where to dig the records up, county by county.
Download the PDF — free, no form
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The comparison, side by side
Two figures, honestly built: roughly what income tax a sale would trigger today, and roughly what property-tax value your children would inherit. They are not the same kind of number and the tool will not add them together for you — that judgment is yours.
Your situation
Also used as the assumed fair market value at the date of death on the inherit side. Nobody knows that number in advance.
Your adjusted basis. Capital improvements — additions, a new roof, re-piping, major systems — add to basis. Routine repairs and maintenance do not. Go find the receipts; they are worth real money.
Commission, escrow, title and seller-paid credits. These reduce the amount realized, and therefore the gain.
It is on your property tax bill. Not the market value — the taxable value.
Taxable income after deductions. The capital gain stacks on top of this, which is what determines your federal bracket. This figure is also used as a stand-in for modified AGI in the NIIT test; real modified AGI is usually higher, so the NIIT line here can run low.
Periods aggregating 2 years — 730 days, not necessarily continuous — during the 5 years ending on the sale date. Usable once in any 2-year period. If you are in a care facility, see §121(d)(7) above before answering “no.”
California taxes capital gains as ordinary income through graduated brackets. This starts at the top marginal rate of 12.3%, which is a ceiling, not a prediction — most sellers land below it. Slide it to the rate your CPA gives you. The additional 1% mental health services tax on taxable income over $1,000,000 is added separately below, which is why California tops out at 13.3%.
Be honest with this one. It is the switch that decides the entire property-tax side.
If you sell now
| Sale price | |
| Less selling expenses | |
| Amount realized | |
| Less adjusted basis | |
| Gain | |
| Less §121 exclusion | |
| Taxable gain | |
| Federal capital gains tax (real 2026 brackets) | |
| California income tax | |
| California 1% mental health services tax (income over $1,000,000) | |
| Net Investment Income Tax (3.8%, lesser-of rule) | |
| Estimated income tax if sold now |
If the children inherit
| Income tax on your lifetime appreciation | $0 |
| Basis for the children under §1014 | |
| Your factored base year value | |
| Exclusion allowance (transfers 2/16/25–2/15/27) | |
| Excluded amount | |
| Excess above the excluded amount | |
| Children's new taxable value |
Read this before you trust any number above. This is a rough educational estimate, not a tax calculation and not advice. It assumes a straightforward principal-residence sale by a California resident. It does not handle depreciation recapture from a rental or home office, installment sales, partial interests, multiple owners, trusts, prior use of the exclusion, or your actual California bracket — and it treats today's value as the value at a future date of death, which nobody can know. I am a broker, not a CPA. Take these figures to your CPA and your estate attorney and let them do it properly.
Sell now or inherit — the questions I actually get
Is it always better to hold the house so the children get the step-up in basis?
No. It is often better, and on a long-held California home the step-up is usually the single biggest number in the comparison — but it is not automatic. Holding only wins if you can afford to hold, if the house is not a burden, and, on the property-tax side, if a child will genuinely move in within one year of the transfer. If no child will live there, the low Prop 13 base is lost either way, and the decision comes down to money you need now versus income tax your children may never owe.
What is the step-up in basis, in one sentence?
Under IRC §1014, when property passes at death the income-tax basis resets to the fair market value on the date of death — so all the appreciation during your lifetime escapes income tax entirely.
We are married and hold the house as community property. Does that change anything?
Yes, and it is worth asking your attorney about specifically. Under IRC §1014(b)(6), community property held by a married couple in California gets a full step-up on the entire property at the first spouse's death — not half. Joint tenancy steps up only the decedent's half. IRS Publication 523 gives the illustration: a home with a $50,000 adjusted basis and a $100,000 fair market value at death leaves a joint-tenancy survivor with a $75,000 basis, but a California community-property survivor with a $100,000 basis. How your deed reads is consequential. That is a question for your attorney or CPA, not for me.
My child will not move into the house. What happens to the property tax?
The low base is gone. For transfers on or after February 16, 2021, the parent-child exclusion from reassessment applies only if a child makes the home their principal residence within one year of the transfer and files the homeowners' exemption (BOE-266) or the disabled veterans' exemption (BOE-261-G). The one-year move-in is a hard eligibility gate with no late relief. Miss it and the home is reassessed at full market value. Filing the exemption late is different — that costs you retroactivity, not eligibility.
Is the $1,044,586 cap a cliff? Do we lose the exclusion if we are over it?
No — it is a cap on the amount excluded, not a cliff that disqualifies the transfer. The arithmetic under Rule 462.520(c)(1) is: excluded amount equals the factored base year value plus $1,044,586; the excess is fair market value at transfer minus that excluded amount, floored at zero; the new taxable value is the factored base year value plus the excess. Only the excess gets added. The $1,044,586 figure applies to transfers dated February 16, 2025 through February 15, 2027.
What if I have to move into a care facility before I can sell?
There is a specific rule for this, and it matters here. Under IRC §121(d)(7), if you become physically or mentally incapable of self-care and you owned and used the home as your principal residence for at least one year of the five-year period, the time you spend in a state-licensed care facility counts toward the two-year use requirement. That gives you the full exclusion — $250,000 single or $500,000 married filing jointly — not a prorated one. Families often assume the exclusion is lost once a parent moves out. Frequently it is not.
Do we need to worry about federal estate tax?
For the overwhelming majority of the families I work with, no. The federal estate tax exemption for 2026 is $15,000,000 under IRC §2010(c)(3)(A) as amended by Pub. L. 119-21. And there is no 2026 sunset — the scheduled cliff was repealed, so you can stop worrying about the exemption being cut in half. For this decision, the numbers that actually move are income-tax basis and property tax, not estate tax.
What if the children want to rent it out instead of living in it?
Then there is no exclusion at all. An inherited home kept as a rental is reassessed at full market value. The children still get the step-up in basis for income-tax purposes, but the property-tax bill jumps to what a brand-new buyer would pay. That single fact flips a lot of families from “keep it in the family” to “sell it and divide the money.”
What was the exclusion allowance before, and what happens next?
It has been indexed twice. The excluded amount above the factored base year value was $1,000,000 for transfers from February 16, 2021 through February 15, 2023; $1,022,600 from February 16, 2023 through February 15, 2025; and $1,044,586 from February 16, 2025 through February 15, 2027. The Board of Equalization re-indexes every two years, so the next change lands February 16, 2027. Date of death is the date of transfer, so the figure that applies is the one in effect on the date of death — not the one in effect when the plan was written.
What forms and deadlines are involved on the inheritance side?
The parent-child claim is BOE-19-P, due within three years of the transfer, or before the property is transferred to a third party, or when an eligible transferee no longer occupies — whichever comes first. Grandparent-to-grandchild uses BOE-19-G, and additionally requires that all of the grandchildren's parents who qualify as children of the grandparents be deceased as of the transfer date, with a stepparent son-in-law or daughter-in-law exception. The child also files BOE-266 for the homeowners' exemption. Separately, there is a change-in-ownership statement (BOE-502-D) due within 150 days of death when there is no probate, or filed with the inventory and appraisal if the estate is probated, and trustee notice under Probate Code §16061.7. The probate and trust sale page and the surviving spouse guide go through those.
Can I sell now and still keep a low property-tax base?
If you are 55 or older, yes — on a replacement primary residence. Prop 19 lets you transfer the factored base year value of your primary residence to a replacement primary residence anywhere in California, up to three times (Rule 462.540). The replacement has to be bought or built within two years of the sale, either direction, and you claim it on BOE-19-B within three years, filed in the county where the replacement home is. On the value test, only the excess over 100% of the original's full cash value (buying before the sale), 105% (first year after) or 110% (second year after) gets added to your transferred base — not the whole difference. The Prop 19 guide works through it.
Have someone look at it with you
Send me what you know and I will send back a written summary of how the decision looks in your case — including, when that is the answer, “don't sell yet.”
- What your home would realistically sell for today, with comps from your street
- The gain estimate, the §121 exclusion, and what is left over
- Your factored base year value and what your children would inherit under Prop 19 — both ways, occupied and not
- The deadlines and forms that apply, dated
- The questions to bring to your CPA and estate attorney, written out
No cost, no obligation, no pressure to list. Estimates and education only — your CPA and attorney have the final word.
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The disclaimer, in plain English. Everything on this page is general education and an estimate — nothing here is legal advice or tax advice, and nothing here is a recommendation about your specific situation.
I am a real estate broker. I am not a CPA and I am not an attorney. I can tell you what a house is worth and what a sale would look like. I cannot tell you what your tax return will say, how your trust should read, or how your title should be held — and I will not pretend otherwise.
This decision genuinely requires your CPA and your estate planning attorney. Get both of them involved before you do anything, including before you decide to do nothing. Bring them these numbers and let them correct me.
And figures change. Federal brackets are indexed annually. The Prop 19 exclusion allowance is re-indexed by the Board of Equalization every two years, with the next change on 2/16/2027. The §121 exclusion and the NIIT thresholds are not indexed at all, which quietly makes them smaller every year. Verify current figures before you act on them.
City of Santa Cruz only: Measure C and inherited homes. Since July 1, 2026 the City of Santa Cruz has charged a graduated transfer tax on the portion of a sale price above $1.8 million — 0.5% to $2.5M, 1% to $3.5M, 1.5% to $4.5M, 2% above that, capped at $200,000. It is on top of the county’s $1.10 per $1,000 and it is marginal, so a $2.6M sale owes $4,500.
The distinction that catches people: the transfer from the person who died, or out of their trust, to the heirs or beneficiaries is exempt (Santa Cruz Municipal Code 3.34.258, adopting Rev. & Tax. Code §11930). The subsequent sale to a buyer is fully taxable — SCMC 3.34.160(b) applies the tax “regardless of the method by which the transfer is accomplished or the relationship of the parties.” Inheriting the house does not exempt selling it. This applies inside city limits only, not to unincorporated county, Capitola, Scotts Valley or Watsonville. The net proceeds calculator accounts for it.
Sometimes the best advice is: keep the house.
I will run the numbers either way, and I will tell you honestly which side they land on — even when that means there is nothing in it for me. That is the whole business model.
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