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What about selling an inherited home in California?
For starters, there are no estate or inheritance taxes in California. So you don’t owe state taxes just for inheriting a property. As the heir, however, you do take on any debts attached to the property, such as an outstanding mortgage.
When selling an inherited home, many of the same considerations apply as they do to selling any California property. Where things differ the most is with capital gains.
Fortunately for heirs, the values of inherited assets are adjusted by what’s called a step-up in basis, Aird says. This means that no matter how much a home has appreciated since it was originally purchased, a decedent’s heirs are not responsible for paying the taxes on those historical gains if they choose to sell the home. Rather, the property automatically converts to the current fair market value.
If the heirs choose to immediately sell that property for the assessed fair market value, then there are no gains. However, if they sell the property for more than the fair market value or choose to hold onto the property for a while before selling, and its value continues to appreciate during that time, then those are considered taxable gains.
Other selling expenses to anticipate in California
Title fees: These consist of title insurance and a title search. Title insurance is a contractual obligation to protect against any issues with a home’s title, such as illegal deeds, undiscovered wills, or forgeries.
In Northern California, it is customary for the buyer to pay for the title insurance, but the opposite is usually the case in Southern California. It’s not uncommon for the parties to negotiate over this item or split the cost, which can range between 0.5% and 1% of the sale value.
A title search, which costs between $100 and $250, can be paid by either the seller or the buyer and is done to prove that the seller is the rightful owner of the property and that there are no outstanding claims or judgments.
Settlement fees: Amounting to about 1% of the home sale value, this lump sum (also known as escrow fees) is issued by the title company, escrow company, or attorney facilitating the closing of the transaction. The payment is designed to cover all that’s involved in handling the final paperwork and distributing funds to the appropriate parties. As with title fees, this can be paid by either the buyer or seller, but is often split between both parties.
Agent commissions: For years, the agent commission fee in California has been hovering at 5% to 6% of the home’s sale price, split between the seller’s agent and the buyer’s agent. The seller usually paid the fee.
However, the historic settlement reached by the National Association of Realtors (NAR) reshaped how commissions are handled in real estate transactions. Under the new rules, buyers now negotiate commissions directly with their agents, rather than relying on sellers to cover them.
This change reduces sellers’ fees to around 2% to 3%. Despite this change in rules, some sellers choose to cover the buyer’s agent as a tactic to attract buyers and secure a sale.
Ways to prepare for real estate taxes
Real estate taxes don’t need to be a surprise or intimidating. There are some simple steps to take that can help you prepare for what’s to come if you decide to sell a home in California.
- Know your home’s value: Use an online automated valuation model (AVM) tool like HomeLight’s free Home Value Estimator to have a ballpark idea of what your home might be worth. This can help you calculate the potential capital gains from the home sale.
- Save the right documents: Know what tax documents you will need if you purchase or sell a home. Consult with your tax advisor about the federal and state documents required to file in California and the tax breaks that might be available for your selling situation.
- Find a top agent: Partner with an experienced real estate agent who can guide you through the home sale process. A qualified agent can help you understand the tax ramifications and ensure a favorable outcome by maximizing your profit. Our data shows that the top 5% of real estate agents across the U.S. sell homes for 10% more than the average real estate agent.
HomeLight makes it easy to find top-performing real estate agents in your market. We account for factors like the real estate agent’s sale-to-list-price ratio and how it aligns with local price trends so that you can partner with top agents who will put more cash in your wallet when you close.
