When a loved one dies, families often find themselves struggling not only with grief but also with the confusing world of probate and taxes. One of the most common sources of anxiety is the question: if the estate sells a family home, who pays the tax? To answer that, let’s examine a simple example that illustrates how the rules actually work in California.
The basics: basis and step-up
In tax law, “basis” is simply the starting point for calculating gain or loss. If you buy a house for $20,000 and later sell it for $200,000, your taxable gain is the difference between the sale price and your basis. Without any special rules, families could face huge tax bills when selling property that had been owned for decades.
Fortunately, federal law provides what’s called a “step-up in basis.” Under Internal Revenue Code section 1014, the basis of most assets is reset to the fair market value on the date of death. That means the heirs do not inherit the decedent’s original purchase price; instead, their starting point for tax purposes is the property’s value when their loved one passed away.
Walking through the example
Imagine that a parent purchased a home in 1980 for $20,000. The parent passed away in 2010, when the home was worth $100,000. At that moment, the tax basis stepped up to $100,000. Five years later, in 2015, the probate was opened, and the home was then worth $150,000. That number may seem important, but it isn’t—probate opening does not create a new basis. Finally, in 2020 the estate sold the home for $200,000, and in 2021 the estate distributed the proceeds to two heirs.
So where does the tax come in? Because the basis was locked at $100,000 in 2010, the estate’s taxable gain is the difference between that number and the $200,000 sale price. In other words, the estate must report $100,000 of capital gain. The estate files its own tax return (IRS Form 1041) and either pays the tax directly or issues Schedule K-1 forms to carry the income out to the heirs. Either way, the estate is the taxpayer. The heirs are not taxed merely because they inherit.
This point often surprises families. They expect that if two heirs split $200,000, each will walk away with $100,000. But that is not how the math works. The estate first has to settle its own tax obligations. If the estate pays, for example, $20,000 in capital gains tax on that $100,000 of appreciation, only $180,000 remains to distribute. That means each heir receives slightly less than $100,000. The inheritance itself is not taxable income, but the tax paid by the estate reduces what is left for distribution.
Why probate speed matters
Notice what happened in our example: the house rose in value between 2010 and 2020. All of that increase after the date of death is taxable when the estate sells. The longer probate drags on, the more time there is for appreciation, and the bigger the taxable gain. This is one reason families benefit from completing probate efficiently. Delays can translate into smaller checks for the heirs.
The role of a CPA
Another lesson from this example is the importance of involving a certified public accountant. Estate and trust tax filings involve choices—such as whether to pay the tax at the estate level or push income out to beneficiaries—that can have real consequences. A CPA can also evaluate whether elections like an alternate valuation date under Internal Revenue Code section 2032 might reduce the taxable amount. The executor’s decisions, guided by professional advice, can make the difference between maximizing what heirs receive and leaving money on the table.
California-specific considerations
For California families, the state generally conforms to the federal rules on step-up in basis and estate income taxation. That means the same principle applies: basis resets at death, and the estate is the taxpayer when property is sold during probate. But California has its own separate system of property tax, which can come into play if heirs keep real estate. Proposition 19, effective in 2021, sharply limited the ability of children to inherit their parents’ low property tax base unless the property is used as the child’s primary residence. This rule does not affect capital gains, but families should be mindful of it when transferring homes.
Putting it all together
The example is straightforward: in 1980 the house cost $20,000, but in 2010 the step-up raised its basis to $100,000. When the estate sold for $200,000 in 2020, it had a $100,000 taxable gain. After paying capital gains tax, the heirs received a little under $100,000 each. The key lessons are that probate delays can increase taxable gains, and professional tax guidance can help preserve more of the estate’s value for the family.
Final thoughts
Inheritance itself is not income. What gets taxed is appreciation after the decedent’s death, and that tax is borne by the estate before distributions are made. For families, that means two things: finish probate without unnecessary delay, and work with a CPA to make wise tax decisions. Those steps can go a long way toward protecting your family’s financial future during a difficult time.
Sources
- CEB, California Estate Planning (2025 update).
- CEB, California Decedent Estate Practice (2025 update), chs. 10, 11, 32.
- CEB, Transferring Property Without Probate (2025 update).
- California Style Manual (4th ed.).
For readers in Kern County, California, contact Jared R. Clemence at 661-843-6370 to schedule a consultation regarding your probate needs.