How Long Must One Occupy an Inherited House for Cost Basis in CA?

Question from M, How Long Must One Occupy an Inherited House for Cost Basis in CA?

Answer from AI:

When inheriting property, such as a house, understanding the tax implications and requirements for maintaining the original cost basis is important. In the context of inheritance, the “cost basis” is the value of the property for tax purposes, which is used to determine the gain or loss when the property is sold.

Understanding Cost Basis for Inherited Property

In general, when a person inherits property, the cost basis is “stepped up” to the fair market value of the property at the time of the decedent’s death. This means that the inheritor’s cost basis would be the value of the house at the time of the previous owner’s death, not what the previous owner originally paid for it.

Occupancy Requirements for Retaining Cost Basis

For federal tax purposes, there is no requirement that an inheritor must live in the inherited property for a certain period to retain this stepped-up cost basis. The new basis is established at the time of the previous owner’s death, regardless of the inheritor’s use of the property.

California Property Tax Considerations

However, when it comes to property taxes, California has specific rules. Proposition 19, passed in November 2020, changed the rules for property tax reassessments for inherited properties. Under Proposition 19, if a child inherits a home from a parent, the property can maintain the parent’s property tax base only if the child uses the home as their primary residence. If the property is not used as the child’s primary residence, it will be reassessed at its current market value, which could result in significantly higher property taxes.

It’s important to note that tax laws are complex and can change, so consulting with a tax professional or estate planning attorney is recommended for personalized advice.

Renting Out the Inherited Property

If your father decides to rent out the property, for federal tax purposes, the cost basis for calculating capital gains upon a future sale would still be the stepped-up basis. However, for property tax purposes, renting out the property could trigger a reassessment under California law, leading to higher property taxes.

Consulting a Professional

Given the high value of the property in question and the complexities of tax law, it is advisable for your father to consult with a tax advisor or estate planning attorney who can provide guidance tailored to his specific situation. They can help navigate the rules of Proposition 19 and other relevant tax considerations.

For more information on inheritance and tax implications, you can visit the IRS Publication 559 for federal guidelines or the California State Board of Equalization for state-specific information.

Remember, this information is general in nature and should not be construed as legal advice. Tax laws can be complex and subject to change, and professional advice is crucial in matters involving significant financial decisions and potential tax liabilities.