Questions sellers ask I’ve inherited a house. What do I need to do, and in what order?

Situation one: both parents have died, and the house is yours

The appraisal — now, not later

Get a retrospective appraisal with an effective date of the date of death, and get it in the first few months.

Nobody will ask you for it yet. No law requires one when no federal estate tax return is filed, and with a $15,000,000 federal exclusion in 2026, almost no Palo Alto estate has to file one. But when you eventually sell, your basis is the date-of-death value, and proving that number is your problem, not the IRS’s. An appraiser can work backwards years later, but it costs more, it is more arguable, and the evidence is thinner every year.

If you sell within a few months, the sale price itself is usually the best evidence there is and a separate appraisal adds little.

Source: IRC §1014; Treas. Reg. §20.2031-1(b), which defines the standard as what a willing buyer would pay a willing seller, neither under compulsion.

Is a higher appraisal better, or worse?

Higher is better for you, and it costs nothing. Your basis is the appraised date-of-death value. A higher value means a higher basis, which means a smaller gain when you sell.

The usual reason to want a low valuation is estate tax — and with a $15M federal exclusion and no California estate or inheritance tax at all, that pressure does not exist for almost anyone here.

But it has to be defensible, not merely high. An appraisal is an opinion supported by comparable sales on a specific date, and one that cannot be supported is worse than useless.

When do you have to sell by?

There is no deadline. This is the single most common misunderstanding of the whole subject, and it usually comes from confusing two different things.

What is true: sell soon and the sale price is close to your basis, so the taxable gain is small or nil. Hold for five years and Palo Alto appreciation starts accumulating again from the new basis — and that gain is taxable, with no §121 exclusion available unless you have lived there as your main home for two of the last five years.

So it is not a deadline. It is a slope: the longer you hold, the more of a new gain you build.

Can you take the low property tax bill with you to your next house?

Usually no, and this is where families are most often misled.

Two separate conditions have to be met, and inheriting the house satisfies neither on its own.

First, you have to still have a low base at all. An inherited house is reassessed to market value at the date of death unless the parent-child exclusion applied — which since February 2021 requires that you make it your principal residence and file for the homeowners’ exemption within one year of the death, and file form BOE-19-P within three years or before the house is sold, whichever comes first. Miss that and the house is already at market value; there is no low base to carry anywhere.

Even when it applies, the exclusion is capped: your new taxable value is the parent’s factored base year value, unless market value exceeds that base plus $1,044,586 — the 2026 figure, indexed every two years and in force through February 15, 2027. Anything above that gets added.

Second, to move a base to a different house you have to qualify in your own right — 55 or older, severely and permanently disabled, or a wildfire or declared-disaster victim — and the house you are moving the base from must be your own principal residence at the time you sell it, or have been within two years of buying the replacement.

So the heir who never lived in the house has nothing to transfer. The heir who moved in, filed on time and is over 55 does.

Source: California BOE, Proposition 19 guidance and Letter to Assessors 2024/044; BOE News Release NR-25-02 for the indexed cap.

If you do qualify: cheaper house, or more expensive?

Cheaper or the same: your factored base year value transfers unchanged. Nothing is added.

More expensive: you keep your base and the excess is added on top. The threshold is 100% of the original’s market value if you buy before you sell, 105% within a year after, 110% within two years.

Worked through, using the BOE’s own example: original market value $400,000, base year value $100,000. You buy a replacement in the first year for $600,000. The threshold is 105% × $400,000 = $420,000. The excess is $180,000. Your new taxable value is $100,000 + $180,000 = $280,000 — not $600,000.

You have two years from the sale to buy or build, with no hardship exception, and three years from the purchase to file the claim for full retroactive relief. Up to three transfers in a lifetime.

What tax will you actually owe?

If you sell close to the date of death, often almost none, because the gain is close to zero.

Where there is a gain, three layers apply:

California has no estate tax and no inheritance tax. The federal estate tax is a non-issue below $15,000,000 per person.

Source: Rev. Proc. 2025-32 for the 2026 federal brackets; IRS NIIT guidance; FTB. California’s 2026 brackets had not been published by FTB as of late September 2026 — the 13.3% top rate is the part that is certain.

Yes, money is withheld at closing

California withholds 3⅓% of the gross sale price through escrow — about $133,000 on a $4M sale — unless an exemption is certified on Form 593.

You may instead elect to have the withholding computed on the gain at your own tax rate, which on an inherited house with almost no gain is usually far less. That election is made on Form 593 before closing.

Get this right in escrow, because afterwards there is no refund mechanism. FTB is explicit: over-withheld amounts “may be recovered only by claiming the withholding as a credit on the appropriate year’s tax return.” The money sits with the state until you file.

Was it in a trust? What to look for

Go through the papers for any of these:

• A declaration of trust or trust agreement, usually a bound document with your parents named as trustees and a successor trustee named
• A grant deed transferring the house into the trust — the owner on title reads something like “the Smith Family Trust dated March 12, 1998”
• A pour-over will, which usually accompanies a trust
• The property tax bill and the title insurance policy, which name the owner of record
• Any certification of trust, a short form used to prove authority

The quickest check costs nothing: the Santa Clara County Recorder’s index shows the last recorded deed and who holds title. If the trust owns the house, the successor trustee can usually sell without probate. If your parents owned it in their own names with no trust and no other arrangement, the sale most likely goes through probate, which is slower and more expensive.

Which of those you are in is a legal question and worth one hour with an estate attorney. It is also the question that decides who is allowed to sign a listing agreement, so it comes before anything Maggie does.

If you move in, is it your primary residence straight away?

For the capital gains exclusion, no. §121 requires you to have owned and lived in the home as your main residence for two of the five years ending on the sale date. Moving in on the day you inherit starts a clock; it does not finish one. Time your parents lived there does not count for you.

Sell in year one and you get no exclusion — but you probably do not need one, because the step-up already removed the gain. Live there two years and you can exclude $250,000 of gain, or $500,000 if you are married and file jointly.

For property tax, “principal residence” means something different and the clock is far shorter: to keep your parents’ assessed value you must move in and file the homeowners’ exemption within one year of the death. Same phrase, two systems, two deadlines.

How much can you afford next?

Work it in this order, and do it before you list rather than after:

1. The likely sale price, as a range
2. Minus selling costs — commission, transfer tax, escrow, title, preparation
3. Minus any mortgage or lien still on the property
4. Minus the state withholding, if you cannot certify an exemption — you get it back, but not this year
5. Minus the actual tax on the gain, from your CPA and not from a calculator
6. Minus anything owed to siblings or the estate

What is left is your cash. What you can buy also depends on whether you carry a base year value with you, because the property tax on the next house is a monthly number for as long as you own it.

Maggie can give you a defensible figure for lines 1 and 2, and the rest is a conversation with your CPA. Bring both answers to the same table.

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Situation two: one parent has died, and the surviving spouse owns the house

This is a different problem, and a much better one.

The whole house probably stepped up, not half of it

California is a community property state. When the first spouse dies, both halves of community property take the new date-of-death value — not just the deceased spouse’s half.

On a $4M house bought in 1975, that is roughly the difference between a basis of $2.1M and a basis of $4M. Call it $1.9 million of gain that either exists or does not.

Source: IRC §1014(b)(6); IRS Publication 551.

Whether a particular house is community property is a legal question. It depends on when and how it was bought, what happened to title over the years, and what the trust says. A house one spouse owned before the marriage may not be. Ask the estate attorney; do not assume.

What that means for the decision to sell

A surviving spouse who sells reasonably soon after the death is in an unusually good position:

• The basis is the date-of-death value, so the gain is small
• On top of that, §121 is available if they have lived there two of the last five years — $500,000 rather than $250,000 if the sale happens within two years of the spouse’s death and they have not remarried
• California withholding can usually be exempted on Form 593 as a principal residence

In plain terms, a surviving spouse selling within two years often pays little or no income tax on the sale. That window closes, and after it the exclusion drops to $250,000.

Or hold it, and let the children inherit it

The other side is real and worth stating: if the house passes at the surviving spouse’s death, it steps up again, and the gain accumulated in the meantime is erased for the children too.

So the honest comparison is not “sell now or sell later”. It is:

Sell now — a small tax bill, cash to live on, no house to maintain, and freedom to move.

Hold and pass it on — no income tax at all on any of the appreciation, but the children face a property tax reassessment under Proposition 19 unless one of them moves in and files within a year, and they inherit a house to agree about.

Neither is the right answer in general. Which one is right depends on whether the surviving spouse needs the money, whether any child would actually live there, and how much the house costs to keep.

Paying the tax

Tax on a sale is not withheld the way payroll is. What escrow withholds is that 3⅓% state amount, which is a deposit against the eventual bill and frequently exempt on a principal residence. The real tax is paid with the return — and if the amount is large, quarterly estimated payments may be required during the year to avoid an underpayment penalty.

Your CPA will tell you which quarters and how much. Ask before escrow closes, not in April.

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The thing both situations have in common

The expensive decisions here are made in the first twelve months, usually by families who are not thinking about taxes at all, and for perfectly good reasons.

One hour with an estate attorney and one with a CPA, early, is the cheapest money in the entire process. Maggie’s part — what the house is worth, what it would take to sell it well, what the date-of-death value ought to be supported by — is the easy part, and it comes second.

Not legal or tax advice

Maggie is a licensed REALTOR® (DRE #02117367), not an attorney, a CPA or a tax adviser. This page describes how these rules work in general, with the sources named, current as of September 29, 2026. It is not advice about your family’s house, and the figures above are illustrations rather than estimates for any particular sale.