Updated August 16, 2026
This is the most consequential decision I am asked about, and the one most often made on instinct. A family has owned an LA apartment building for thirty or forty years. The basis is almost nothing, the rents are far below market, the parents are ageing, and everyone has a view. Sell now and take the money, or hold it, let the children inherit it, and let the step-up in basis erase the capital gain.
The instinct is almost always "hold — why would we pay tax we don't have to?" That instinct is right more often than it is wrong. But it is right for a narrower set of families than believe it, and the reason is a change most owners have not priced in: since Proposition 19, holding the building no longer passes it to your children on the old terms.
Almost every bad version of this conversation comes from treating one tax as though it were the other.
Income tax basis — helped by holding. At death, the property's basis for income tax generally resets to its date-of-death value. Decades of capital gain and all the accumulated depreciation recapture disappear. Heirs who sell shortly after inheriting often owe very little.
Property tax basis — hurt by holding. Proposition 19 eliminated the parent-child exclusion for anything other than a primary residence the child then occupies. On transfer to children, an apartment building is reassessed to market value.
Both happen at the same moment, and they pull in opposite directions. The step-up is a gift to whoever sells. The reassessment is a bill for whoever holds.
Selling now triggers, on a long-held LA building: federal capital gains, depreciation recapture at its own less favourable rate, the net investment income tax where it applies, California's treatment of the gain as ordinary income at state rates, Measure ULA at 4% or 5.5% of gross price inside LA City, and 3⅓% withheld at closing. On a building with a basis near zero, the combined bite is large and it is immediate.
Holding to death avoids the income tax entirely via the step-up — and hands the next generation a building assessed at current market value. That is the part families do not model. A building carrying an assessed value of a few hundred thousand dollars, reassessed to several million, produces a property tax bill several times larger, landing on a rent-stabilized income stream that by ordinance cannot rise to meet it.
The LA City allowable increase for the year to June 2027 is 3%. If the property tax line multiplies and the rent line is capped at 3%, the building's net income does not merely dip. It can invert.
A lifetime 1031 exchange defers the income tax without requiring anyone to die first, and the deferred gain can still be eliminated by the step-up later. That converts the question from "sell or hold" into "hold what".
It is often the answer for a family whose real problem is the asset rather than the timing: exchange out of the management-heavy rent-stabilized building into something the next generation can actually own — net-leased property, a DST interest, or simply a newer building outside rent control — and hold that to death.
The property tax reassessment on transfer still happens. But you have chosen an asset whose income can carry it, instead of one whose income is capped by ordinance.
Every version of this analysis needs one input that families consistently do not have: what the building is actually worth today.
Not the assessed value, which on a long-held LA building is not remotely close. Not what the neighbour got in 2021. A current, defensible figure grounded in recent comparable closings.
Without it, the CPA cannot compare the tax paths, the estate attorney cannot structure anything, and the family argues about a number instead of a decision. I have watched families spend two years disagreeing and then resolve it in a single meeting once everyone was looking at the same value.
I do not start with the tax. I start with three facts.
What is the building worth today, and what does it net after everything? Gain, recapture, ULA, withholding, commission, payoff.
What is the projected property tax after reassessment, against current net income? If that number is negative, the hold case is usually finished regardless of the step-up.
Who is going to run this building in ten years, by name? Not "the family". A person. If nobody can be named, that is the answer.
Then the CPA and the estate attorney do their work with real inputs, and the decision usually makes itself. My job is to make sure the value in that analysis is honest — including when the honest answer is that this building is worth holding and the family should ignore me for another decade.
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