What Happens If the Estate Owes Taxes?

Valid tax obligations are paid from the estate before anything is distributed to heirs. The good news for most families is that California has no state estate tax, and the federal estate tax only applies to very large estates above the federal exemption, so the typical home-owning estate owes no estate tax at all.

What can apply are final income taxes for the decedent, income the estate earns during administration, and ongoing property taxes on the home. Any liens for unpaid taxes are cleared at the sale closing. Your attorney and a CPA make sure the right returns are filed. Where a home has appreciated, the more relevant issue for heirs is capital gains, which the stepped-up basis usually reduces sharply.