When it comes to handling real estate taxes tied to estates and trusts, mistakes are more common than you might think, and they’re often expensive. Whether you’re administering a trust, managing a probate estate, or planning for your family’s future, it’s not enough to simply hand everything to a general accountant and hope for the best.
Real estate tied to estates and trusts requires a deeper understanding of tax law, timing, and compliance. That’s why the most successful trustees and executors in Orange County turn to specialized professionals like an experienced estate and trust accountant to avoid common pitfalls.
I’m Donna L. Stern, CPA, and after decades of working with estate and trust tax clients in Orange County, I’ve seen it all. Here are five real estate tax mistakes I regularly see, even from well-meaning people with good advisors. If you’re in charge of an estate, a trust, or just want to avoid making costly moves, take note.
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Not Getting a Step-Up in Basis Valuation
This is one of the biggest missed opportunities, and it’s one that the average accountant might overlook if they’re not focused on estates.
When someone passes away, their real estate typically receives a step-up in basis to its fair market value at the date of death. If that home was bought decades ago for $100,000 and is now worth $1.5 million, that’s a $1.4 million gain wiped clean from capital gains tax if handled correctly.
The mistake? Failing to get a qualified appraisal at the right time. Without it, you could be stuck using the original basis and paying massive capital gains tax later.
Tip: Always get a formal appraisal around the date of death. Don’t rely on guesswork or Zillow estimates. This isn’t optional; it’s a tax strategy.
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Filing the Wrong Return – or Not Filing at All
A trust or estate is a legal tax entity, which means it often needs to file its own tax return – Form 1041. If you’re the executor or trustee, it’s your job to make sure this happens.
But many people confuse personal returns, estate returns, and trust returns. That confusion can lead to:
- Late penalties
- Missed deductions
- IRS notices that cause real stress
And remember: Filing isn’t just about checking a box. A seasoned estate accountant knows how to structure distributions and deductions to minimize taxes for both the estate/trust and the beneficiaries.
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Waiting Too Long to Sell Estate Property
Real estate held in a trust or estate doesn’t always need to be sold right away, but holding on too long can cause tax headaches.
Why?
- Appreciation after death can create new capital gains if you don’t sell within a reasonable window.
- Rental income from the property brings a different set of tax rules and can complicate the estate’s return.
- Property taxes under Prop 19 (in California) can skyrocket if you’re not eligible for parent-child exclusions.
What’s the fix? A smart trust accounting strategy that includes timing property sales in coordination with the step-up in basis and the estate’s closure timeline.
Every estate is different, but if you’re just holding property “to decide later,” you’re likely creating a bigger tax bill than you need to.
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Not Understanding California’s Property Tax Rules (Prop 19)
Since Proposition 19 passed, many families are surprised when their inherited property’s tax bill jumps overnight. That’s because parent-to-child exclusions aren’t automatic anymore, and they’re much more limited.
If you don’t qualify for an exclusion, the property will be reassessed at full market value.
This means: A property that’s been taxed at $4,000/year for decades might suddenly be taxed at $15,000/year or more.
Mistake: Assuming you’ll inherit your parents’ or grandparents’ tax rate.
Solution: Consult a CPA who understands both estate tax rules and California’s property tax regulations. This isn’t a generalist’s job.
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Treating Trust and Probate Accounting Like Basic Bookkeeping
Handling the books for a trust or estate isn’t just about balancing a checkbook.
You have to:
- Track income and expenses for the estate
- Allocate those to beneficiaries
- Maintain court-compliant accounting if the estate is in probate
- Prepare detailed reports if required by the trust terms
And here’s the catch: If you’re off by even a small amount, it can cause more issues than doing it right the first time.
That’s why clients across Orange County look for experts in probate accounting and trust accounting, not just a general bookkeeper or tax preparer.
Why Work With a Specialized Estate Accountant?
At Donna L. Stern, C.P.A., we don’t just file forms. We help clients avoid unnecessary taxes, stay in compliance, and keep beneficiaries happy by making everything run smoothly.
Our focus is on:
- Estate and Trust Tax in Orange County
- Trust Accounting and Probate Accounting
- Navigating California’s complex real estate and tax rules
Our clients are trustees, executors, estate attorneys, and high-net-worth families who want it done right, not just done.
In Summary: What You Should Do Next
If you’re in charge of an estate or trust with real estate assets, don’t leave taxes to chance. Here’s your action list:
- Get a professional appraisal at the time of death
- Make sure the correct tax returns are filed
- Time real estate sales strategically
- Understand Prop 19 and reassessment risks
- Use proper trust and probate accounting, not DIY spreadsheets
Need Help With Estate or Trust Tax in Orange County?
We’ve helped clients across Newport Beach, Irvine, Huntington Beach, and all over Orange County navigate estate and trust taxes with confidence.
Schedule a consultation with Donna L. Stern, C.P.A., today, and get expert guidance from someone who knows exactly how to protect your estate and your peace of mind.