Parents who want a San Francisco home to stay in the family have three basic paths: sell it to a child, gift it, or leave it as an inheritance. Property tax works the same way on all three under Prop 19. Income tax does not, and the difference can reach hundreds of thousands of dollars.
To keep the comparison concrete, this article uses one example throughout: a San Francisco home that the parents bought decades ago for $300,000 and that is worth $1.5 million today.
Property tax: Prop 19 treats all three the same
Since February 2021, Prop 19 has allowed a child to keep a parent's low property tax base only if two conditions are met. The home must have been the parent's primary residence, and the child must make it their own primary residence within one year and file the exclusion claim with the Assessor.
There is also a value limit. If the market value exceeds the parent's assessed value by more than about $1 million (the figure is adjusted every two years), the excess is added to the child's tax base.
These rules apply whether the child buys the home, receives it as a gift, or inherits it. (Our Prop 19 guide walks through the calculation and the filing deadlines.) If the child will rent the home out or use it as a second home, it is reassessed to market value on any of the three paths. Choosing among sale, gift, and inheritance does not change the property tax outcome. Who lives there afterward does.
Income tax: it all comes down to basis
Basis is, roughly, what the tax system treats as the owner's cost. When a home is later sold, the taxable gain is the sale price minus the basis. Each path gives the child a different basis.
Sell: the parents take the gain now
If the parents sell to their child for $1.5 million, their gain is $1.2 million. A married couple who lived in the home for two of the last five years can exclude $500,000 of that gain ($250,000 for a single owner). The remaining $700,000 is taxed as a long-term capital gain federally, and California taxes it as ordinary income. The child's basis becomes the $1.5 million purchase price, so the old gain never follows them.
A sale also puts cash in the parents' hands, which matters when the home is most of their net worth.
Gift: no tax now, but the old basis carries over
A gift triggers no income tax when it is made. The parents file a federal gift tax return (Form 709), and the gift counts against their lifetime exemption, which is $15 million per person in 2026. Very few families owe actual gift tax. California has no gift tax.
The cost comes later. The child takes over the parents' $300,000 basis. If the child sells for $1.5 million, the child reports a $1.2 million gain. A child who has lived in the home for two years can use their own exclusion, but the rest is taxable.
Inherit: the basis steps up
When a child inherits, the basis resets to the market value on the date of death. If the home is worth $1.5 million at that point and the child sells soon after for about that price, there is little or no taxable gain. The entire $1.2 million of appreciation during the parents' lifetime goes untaxed. California has no inheritance or estate tax, and the federal estate tax applies only above $15 million per person.
The same home, three results
Sell at $1.5M: parents report about $700,000 of taxable gain after the $500,000 exclusion. Child's basis: $1.5 million.
Gift: no tax today. Child's basis: $300,000, with $1.2 million of gain waiting.
Inherit: no income tax on past appreciation. Child's basis: $1.5 million.
San Francisco transfer tax
San Francisco charges a transfer tax based on the price paid. On a $1.5 million sale the current rate works out to $11,250. A true gift with no payment, and a transfer at death, are generally exempt. In San Francisco the seller customarily pays the transfer tax, but like every closing cost it is negotiable, and a family can allocate it however the purchase agreement says.
So which path makes sense?
- Inheritance usually produces the lowest income tax, but it means waiting, and the parents keep the costs and responsibility of ownership.
- A sale fits when the parents need the equity for retirement or care, when the child is ready to buy now, or when fairness among siblings calls for a clear market price.
- A gift is simple and immediate, but it is often the most expensive path in the long run for a home that has appreciated a lot since it was bought.
These paths can also be combined. A sale below market value, for example, is treated as part sale and part gift and carries tax consequences of its own. Larger estates sometimes call for other tools, such as a qualified personal residence trust. Decisions like these belong with an estate attorney and CPA, not a broker, and should be made before any transaction is signed.
Where a broker fits
Gifts and inheritances are handled by estate attorneys and CPAs. A sale between parent and child is a real estate transaction like any other: a purchase agreement, disclosures, escrow, title, and often a lender. That is the part we handle. If you already have your buyer, a full-service commission pays for marketing you do not need. Our San Francisco clients pay a flat $6,000 instead.
Common questions
Does Prop 19 treat a sale to my child differently from a gift?
No. The parent-child exclusion applies to purchases and other transfers alike. In every case the child must make the home their primary residence within one year and file a claim, and the value limit applies.
Is it better to gift a house or leave it as an inheritance in California?
For income tax, inheritance is usually better for a home that has appreciated. An inherited home receives a stepped-up basis, while a gifted home keeps the parent's original basis.
Do parents pay capital gains tax when they sell a home to their child?
They can. The gain is the sale price minus their basis. A married couple can exclude up to $500,000 of gain on a primary residence, and a single owner up to $250,000. Gain above that is taxable.
Does California have a gift tax or inheritance tax?
No. California has neither. Federal gift and estate tax applies only above the lifetime exemption, which is $15 million per person in 2026.
This article is general information, not tax or legal advice. Tax figures are current as of the publication date and change over time. Talk to a CPA or attorney about your own situation.