Hypothetically, what is the best way tax-wise to dispose of a residence in an estate when the owner dies?
If it makes a difference, assume the residence is part of a living trust. Also assume there is no surviving spouse and no mortgage.
I believe there are two ways: (a) sell the property as part of the estate and distribute the proceeds to the beneficiaries; or (b) transfer title to the beneficiaries (or just one beneficiary if that meets the distribution terms of the trust/will), then sell the property.
Assume that the terms of the trust/will does not preclude either approach.
It seems that the tax benefit of #b is that the basis is stepped up. So that would minimize capital gains tax. Right?
Or does #a avoid capital gains tax altogether, at least at the federal level?
Note that Calif law applies here. I believe Calif no longer has estate tax. Right? In that case, is there __state__ capital gains tax in both cases?
Does Calif recognize the stepped-up basis? Or is that just a federal benefit?