Inheriting real estate in California can be both a blessing and a challenge. Alongside the emotional aspects of receiving a loved one’s home or property, there are complex legal, financial, and tax considerations that can have long-term consequences. Below are the key issues every beneficiary should understand before taking title to inherited real property.
Title and Ownership Concerns
Taking Title in Your Own Name
Under California law, property you inherit is considered your separate property—even if you are married. You can take title as your “sole and separate property,” but that designation alone does not guarantee protection.
If community funds are used to pay the mortgage, property taxes, insurance, or maintenance, your spouse may gain a community property interest in the property. To preserve its separate property character, it’s essential to keep careful records and avoid using community funds for upkeep or improvements.
Protecting Against Liability
Inheriting rental or commercial property can expose you to potential lawsuits if a tenant or visitor is injured on the premises. Holding title through a limited liability company (LLC) or other legal entity can provide an important layer of protection. Before transferring inherited income-producing property, consult a lawyer about the best ownership structure to minimize personal liability.
Existing Loans and Lender Issues
If the property you inherit is subject to a mortgage, the due-on-sale clause could allow the lender to call the loan due upon transfer. This may force you to refinance or pay off the loan immediately—something that can be difficult if interest rates are high or financing is hard to obtain.
If you are doing estate planning, consider paying off the mortgage or establishing a plan that allows your heirs to transition ownership smoothly without financial stress.
Federal Income Taxes: Understanding Step-Up in Basis
The tax basis of a property determines how much you will pay in capital gains taxes when you sell it.
If you receive property as a lifetime gift, you take the donor’s carry-over basis—the original purchase price plus any improvements. For example:
If your parents bought a house for $150,000 and gift it to you while they’re alive, your basis remains $150,000. If you later sell the property for $1.5 million, you’ll owe capital gains taxes on $1.35 million.
However, if you inherit the property after your parents’ death, you receive a step-up in basis. The basis resets to the fair market value at the date of death.
Using the same example, if the home is worth $1.5 million at the time of inheritance, that becomes your new tax basis. If you sell it for $1.6 million, your taxable gain is only $100,000—a significant tax savings.
This “step-up” rule is one of the most valuable benefits of inheriting real estate rather than receiving it as a lifetime gift.
California Property Taxes: Proposition 19 Changed Everything
Before Proposition 19, children could inherit their parents’ real estate and retain the same property tax assessment, even if they didn’t live in the home. That meant low annual property taxes often continued for generations.
After Prop 19, the rules became far stricter:
The child can keep the parent’s assessed value only if the property is the parent’s primary residence and the child makes it their own primary residence. Furthermmore, if the inherited property is a rental, vacation home, or commercial property, it will be reassessed at full market value, which can dramatically increase annual property taxes.
This change has made it far more expensive to inherit investment property. Beneficiaries should always verify how Prop 19 applies before transferring title or deciding whether to keep or sell inherited real estate.
The Bottom Line
Inheriting real property in California is far more complex than simply receiving the keys. Title issues, liability exposure, federal income taxes, and property tax reassessments can all affect the true value of your inheritance.
Before making decisions about how to hold, transfer, or sell inherited property, consult an experienced trust and estate attorney. With careful planning, you can preserve your inheritance, minimize taxes, and avoid costly mistakes.
