I inherited a rental property in California. Between Prop 19 and capital gains, what are my options?

An educational overview, not advice. Read the disclosures. They matter.

You didn't buy this. It was left to you.

Maybe a parent held a duplex for thirty years, and now it is yours, along with the tenants, the repairs, and a tax picture nobody sat you down to explain.

Here is what almost no one tells California heirs: the tax story of an inherited rental has two sides, and they pull in opposite directions. One side is a genuine gift. The other is a trap that is specific to California. If you only hear about the gift, you can walk straight into the trap. If you only hear about the trap, you can miss a chance to get out almost tax-free.

... The tax story of an inherited rental has two sides, and they pull in opposite directions. ...

You're David. A transaction can seem like Goliath: the property you did not ask for, the tenants you did not choose, the tax you were never taught. The IRS is the sword. California's Franchise Tax Board is the spear. But neither is the giant. The giant is the decision itself, and this page exists to make it smaller.

The gift: your basis steps up

Start with the good news, because it is real.

When you inherit property, your income-tax basis generally "steps up" to the property's fair market value on the date of the previous owner's death. (Source: IRC Section 1014(a)(1); verified in PO-3 fact-check-log, 2026-06-02.)

In plain terms: for capital-gains purposes, it is almost as if you acquired the property at today's value, not at the price your parent paid decades ago. The years of appreciation that built up during their ownership can effectively drop out of your taxable gain. If you sold shortly after inheriting, at a price near that stepped-up value, your capital gain could be small, sometimes close to zero.

That is a large advantage, and it completely changes your exit math compared to an original owner who is sitting on thirty years of built-in gain. Many heirs assume a huge tax bill that the step-up has already shrunk for them.

The California trap: Prop 19 and your property-tax bill

Now the side California adds, and it catches people precisely because national advice never mentions it.

California's Proposition 19 (operative for transfers on or after February 16, 2021) sharply narrowed the old parent-to-child exclusion from property-tax reassessment. Under the prior rules, a parent could pass down a home and up to $1,000,000 of other real estate, including rentals, without the property being reassessed to current market value. Prop 19 repealed that for investment property. The intergenerational exclusion now applies only to a family home (and a family farm), under conditions, and not to a rental. (Source: California State Board of Equalization, Proposition 19; verified 2026-06-02 and confirmed 2026-07-03.)

What that means for you: the inherited rental can be reassessed to current market value, which can sharply raise the annual property-tax bill you carry. Your parent may have been paying property tax on a decades-old assessed value. You may inherit a bill based on today's value instead. That reshapes the "just keep renting it" decision before capital gains even enter the picture, because the carrying cost that worked for your parent may not work for you.

The layer that surprises the heirs who did their homework

There is one more piece, and it is the one that catches people who already learned about the step-up and thought they were safe.

The step-up resets your basis for the built-in gain, but it does not erase everything going forward. If you keep the property and continue to depreciate it, the depreciation you take after you inherit can still be recaptured when you eventually sell, taxed at a federal rate of up to 25%. In one of our worked examples, an inherited duplex held for eight years after inheritance still generated roughly $81,000 of depreciation recapture. (Source: worked-examples Scenario B; recapture per IRS Publication 544; both verified in PO-3 fact-check-log, 2026-05-26 / 2026-06-01.)

The lesson is simple. Inheriting does not end the tax conversation. It changes which layer bites. The old built-in gain mostly goes away. The property-tax cost can go up. And fresh recapture starts building the day you take over.

... Inheriting does not end the tax conversation. It changes which layer bites. ...

Your real choice

You have three honest paths. The right one depends on whether you want to be a landlord and on what the numbers actually say.

1. Keep it and rent it. Viable, but run the new, possibly higher property-tax number first. The carrying cost that made sense for your parent may not make sense for you now that the assessment can reset.
2. Sell it. Because of the step-up, this is often far cheaper than heirs fear. If you sell near the stepped-up value, the capital gain can be modest. This is the path people most often overlook, because they assume a tax bill the step-up has already reduced.
3. Exit without simply writing a check. If the property has appreciated since you inherited it, or you want out of managing it without a lump-sum tax hit, the same deferral tools open to any California seller are open to you.

If you go the third route, the toolkit is the same one we lay out in full elsewhere: a 1031 exchange, a Delaware Statutory Trust (a way to stay invested in real estate without being a hands-on landlord, which is often the right fit for an heir who never wanted to manage property), or a Qualified Opportunity Zone. Each has real trade-offs, and we name every downside honestly in our companion piece, "What are my options for the tax?". Use the decision tree to narrow the doors to the one or two worth a real conversation.

And if you want the dollar figure first, our California tax calculator shows what a sale would actually cost after the step-up is applied.

One caution that applies if you defer and then leave the state: California does not forget a deferred California gain. If you 1031 into an out-of-state property, California still requires annual reporting on FTB Form 3840 and taxes that gain when you finally sell, even if you have moved away. (Source: FTB 2025 Form 3840 Instructions; verified in PO-3 fact-check-log, 2026-05-26.)

Qualified Opportunity Zone (QOZ) disclosure. Material prepared herein has been created for informational purposes only and should not be considered investment, tax, or legal advice or a recommendation to invest in any Qualified Opportunity Fund ("QOF") or Qualified Opportunity Zone program. Information was obtained from sources believed to be reliable but was not verified for accuracy.

Qualified Opportunity Zone investments are speculative and involve a high degree of risk, including illiquidity, loss of principal, limited transferability, and long holding-period requirements. The tax benefits associated with QOZ investments — including deferral, reduction, and potential elimination of capital gains — are governed by Section 1400Z of the Internal Revenue Code (IRC) and accompanying Treasury regulations, which are subject to change and to differing interpretation. Eligibility for any tax benefit depends on the investor's individual circumstances and strict compliance with applicable timing and reinvestment rules. There is no guarantee that a QOF will meet program requirements or that any anticipated tax treatment will be realized.

It is the responsibility of taxpayers to verify their own taxation obligations. Investors should consult their own tax, legal, and financial professionals before making any investment decision.

Estate Planning disclosure. Material prepared herein has been created for informational purposes only and should not be considered investment, tax, or legal advice or a recommendation. Information was obtained from sources believed to be reliable but was not verified for accuracy.

Estate planning involves complex legal and tax considerations that vary significantly based on individual circumstances and the laws of the applicable jurisdiction. Federal and state estate, gift, and generation-skipping transfer tax laws under the Internal Revenue Code (IRC) and applicable state statutes are subject to change, including scheduled sunset provisions that may alter exemption amounts and tax rates. The strategies discussed may not be suitable for all individuals, and their effectiveness depends on factors unique to each person's situation. Savvy Advisors Inc. does not provide legal advice or prepare legal documents. It is the responsibility of individuals to verify their own circumstances. Investors should consult their own qualified estate planning attorney, tax professional, and financial advisor before implementing any estate planning strategy.

Important Disclosure Regarding Delaware Statutory Trust (DST) Investments

Delaware Statutory Trust ("DST") investments are generally offered through private placement offerings and are intended only for investors who satisfy the eligibility requirements established by the issuer and applicable securities laws. In many cases, DST offerings are available only to investors who qualify as accredited investors.

DST investments are not suitable for all investors. They are generally illiquid, are not listed on a public exchange, and involve investment risks, including the possible loss of principal. Investment objectives, risks, fees, expenses, tax considerations, and offering terms vary by investment and should be carefully reviewed before investing.

Nothing in this material constitutes an offer to sell or a solicitation of an offer to buy any specific DST investment. Any offer may be made only by means of the applicable private placement memorandum and other offering documents. Investors should carefully review these materials and consult with their legal, tax, and financial advisors to determine whether a DST investment is appropriate in light of their individual circumstances.

1031 Exchange Disclosure: DST investments are often used as replacement property in connection with Section 1031 like-kind exchanges. Investors should consult with their qualified tax advisor regarding the tax consequences and eligibility requirements associated with a 1031 exchange. Neither this material nor the adviser provides legal or tax advice.

Why work with us, and how to judge anyone you'd trust with this

An inherited property is exactly the moment people get sold something. Before you hand anyone this decision, ask four questions. Here is how we answer them.

1. How are you paid? We are fee-based. We charge an advisory fee for the analysis and the plan, and we earn no commission on DST placements, so we are not paid more when you choose one door over another.

2. Are you a fiduciary? Yes. Advisory services run through Savvy Advisors, an SEC-registered investment adviser, which carries a legal duty to act in your interest, not merely to recommend something "suitable."

3. Do you actually specialize in this? I hold a Series 65 license; I have spent more than a decade working specifically on 1031 and DST transactions. Real estate is in my family, so the stakes here are not abstract to me. The California details in this article, Prop 19 and the step-up and the recapture that survives it, are the daily work.

4. Will you give me the answer you can't sell? Yes. If the right move is to keep the property, or to simply sell and pay the tax, we say so. There is no product we need to move. We are your sling, not a salesman with a quota.

If an advisor cannot answer those four cleanly, keep looking. If you want to walk your own numbers with someone who can, that is a conversation, not a sales pitch.

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