Inherited Property in SoCal: Tax Basis Step-Up, Sale Timing & FIRPTA Strategy
· Distressed & Risk
Inherited real estate gets a stepped-up tax basis at death. Understand timing, state inheritance rules, and foreign-seller withholding before you list.
When a property owner passes away, the tax foundation for that property changes instantly and permanently. Federal law grants what is called a "step-up in basis" to the heirs. This means that for tax purposes, the property's value resets to what it was worth on the date of death, not what the original owner paid for it decades ago. This is one of the largest tax breaks in the U.S. tax code, and it applies to nearly every heir in California, citizen, green-card holder, and foreign national alike. Before you list an inherited home, you must understand how and when to use this advantage.
Suppose your parent bought a house in 1985 for $150,000, and it is worth $900,000 today when they pass. The stepped-up basis resets your cost basis to $900,000. If you sell the house a few months later for $920,000, you owe federal capital-gains tax only on the $20,000 gain, not the $750,000 of appreciation that happened during your parent's lifetime. This is the step-up at work. That $750,000 escapes income tax entirely. Without this step-up, you would face a much larger tax bill on the full appreciation. Timing your sale matters: the longer you hold after inheriting, the more new appreciation you personally add, and that new gain is taxable to you.
In California, there is a separate and critical rule called Proposition 13 (1978). This law locks property-tax assessments at their value on the date of transfer of ownership. When you inherit, the property is reassessed at its current market value, and your property-tax bill jumps sharply, this is the trade-off for stepping up your income-tax basis. Property tax in California is generally assessed at about 1% of the assessed value, with local fees adding another 0.1–0.25%, for an effective rate commonly around 1.1–1.25% of the current market value. A $900,000 inherited home will thus generate roughly $9,900 to $11,250 in annual property tax going forward. You cannot avoid this reassessment after inheritance, and you must budget for it immediately.
If the deceased owner was a foreign national, a second rule applies when you sell: FIRPTA (Foreign Investment in Real Property Tax Act). When a foreign person sells U.S. real estate, the buyer or the buyer's escrow agent must withhold funds from the seller's proceeds and remit them to the IRS. This withholding is commonly 15% of the gross sale price, and it is a first step toward the seller's eventual tax settlement; it is not a final tax bill, but it ties up cash at closing. FIRPTA applies only to the seller, never to the buyer, if you are the foreign heir inheriting from a foreign parent and then selling, you are the seller and withholding applies to you. If you are a U.S. citizen or green-card holder inheriting from a foreign parent, FIRPTA still applies at your sale because the withholding rule looks only at the current seller's status. Plan for this cash hold-up in your escrow timeline and your post-sale liquidity.
The safest path is to consult a California tax attorney or CPA before listing. They will confirm your personal basis step-up, model the property-tax reassessment, and clarify FIRPTA exposure if applicable. This cost, typically $500 to $2,000 for a consultation, is far smaller than the tax bills and delays you can avoid. Your attorney will also ensure the deed transfer is properly recorded and that the stepped-up basis is documented in your tax records. Once you are ready to sell, a licensed real-estate agent in your county will walk you through timing, market conditions, and the listing process itself.
Escrow for an inherited property usually runs about 30–45 days with financing or roughly 14–21 days for a cash sale, depending on the buyer's lender and your title clarity. Closing costs commonly run 2–5% of the purchase price, paid by the seller unless the buyer agrees otherwise in the purchase agreement. If you are a foreign heir, you may also qualify for a loan to purchase another property; foreign nationals typically start at 30% down payment, and your loan officer can discuss terms based on your documentation and assets. For a detailed rate quote specific to your citizenship and income profile, visit the rates page at https://tuhaousa.com/rates/ (English) or https://tuhaousa.com/zh/rates/ (Chinese).
Do not delay on inherited property decisions. The longer you hold, the more new appreciation you accrue, and that new gain loses the step-up benefit and becomes your taxable gain. The property-tax reassessment is happening immediately after you receive the deed, so your carrying costs are rising every month you are not on the market. If you inherit a rental property or a second home, the rules are the same, but your annual income and depreciation treatment may differ. Contact a tax advisor and a licensed real-estate professional as soon as the property is in your name.
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