Inheriting property in California can be a meaningful gift—one that comes with sentimental value and financial potential. But it can also trigger unexpected tax consequences. Without careful planning, your loved ones may end up paying far more in taxes than they should. That’s why we work with families to help protect their property and reduce the tax burden that can follow an inheritance. If you own real estate in California, now is the time to consider how your estate plan can make things easier for those you care about.
Understanding California Property Tax Laws and Inheritance
California’s rules on inherited property have changed in recent years, especially with the passage of Proposition 19. Under this law, children no longer automatically inherit a parent’s low property tax rate—the property may be reassessed at its current market value, which can dramatically raise the annual tax bill.
There are limited exceptions. For instance, if your child moves into the inherited home and uses it as their primary residence within a year, they may qualify for a partial tax break. But the rules are strict and often misunderstood. Knowing how these rules apply to your situation can make a big difference in what your heirs ultimately pay.
Step-Up in Basis: What It Means for Capital Gains
A step-up in basis is one of the most powerful tax tools available when it comes to inheritance. When someone inherits property, the tax basis typically adjusts to the property’s fair market value at the time of death. This can significantly reduce or even eliminate capital gains taxes if the property is sold soon afterward.
Let’s say your home was purchased for $300,000 and is worth $900,000 when your child inherits it. The new basis becomes $900,000. If your child sells it for that amount, there’s no capital gain to report. That’s a meaningful benefit and one reason why giving property during life might not always be the best move.
Using Trusts to Manage and Minimize Tax Impact
Trusts are a flexible way to manage how your property is passed down, and they can also help reduce taxes and avoid probate. A revocable living trust allows you to retain control of the property during your life while setting clear instructions for what happens after your death. It also helps avoid probate, which can save time and money.
In some situations, irrevocable trusts may offer additional tax advantages, especially for larger estates or those planning across generations. These types of trusts can shift property out of your taxable estate altogether.
While not every family needs a trust, many do benefit from having one in place. We’ll work with you to decide what makes the most sense based on your goals and the value of your property.
Consider Gifting Strategies Before Death
Gifting real estate during your lifetime is another option, but it comes with trade-offs. On the one hand, giving property now can remove future appreciation from your estate. On the other hand, it means your loved ones won’t benefit from the step-up in basis.
Before transferring ownership, consider:
- Current and projected property value
- Gift tax limits
- How the gift fits into your broader estate plan
Why Property Titling Matters
How your property is titled can affect how it transfers and how it’s taxed. California recognizes several forms of ownership, including:
- Joint tenancy, where ownership automatically passes to the surviving owner
- Community property, which can qualify for a double step-up in basis
- Separate property, which may require probate unless addressed in your plan
We often review real estate titles as part of the estate planning process. A small change in how your property is held can have a big impact on taxes and inheritance.
Making the Most of Your Property Plan
Estate planning is about making informed choices that reflect your family’s needs and long-term goals. That includes considering how California property tax laws, title arrangements, and federal inheritance rules may affect what you leave behind. When advanced estate tax planning is needed, we’ll point you in the right direction. If it’s appropriate, we partner with experts who can provide you with the tax advice you need, and then we can help create your trust.
Whether you’re thinking about a trust, updating your will, or just trying to figure out what makes the most sense for your home, we’re here to help.
Keep More of What You’ve Built
You’ve worked hard to build a legacy—don’t let unnecessary taxes chip away at it. With thoughtful planning, we can help you reduce the tax burden on inherited property and pass more value on to your loved ones. Contact OC Wills & Trust Attorneys today to get started.
