Legal Question in Real Estate Law in California

California has an exclusion for the first $250,000 so there should be no tax on the sale.

California? What about the Feds?

Conventional wisdom is that the best way to receive property from your parents without YOU (not your parents) facing a significant capital-gains tax liability (think around 30% or a bit more after 12/31/2012) is to inherit, rather than receive as a gift during their lifetime, the property.

The inheritance can be via a will, or perhaps even simpler, via a living trust your parents would set up during ther lifetimes.

Another reason not to transfer ownership any sooner than necessary is the possibility that property taxes would be affected (upwards).

Overall, the sums of taxes that might be incurred or avoided by the method of inter-generation transfer selected makes it very much worth while to get and follow professional advice. See a real-estate or estate-planning attorney, and/or a CPA with specialization in this area. A few thousand spent on planning could save the family several tens of thousands in unnecessary tax liability.

You have gotten two part right part wrong answers. Shers is wrong that there is a $250k exclusion for California taxes. For a married couple it is $500k. Whipple is wrong to say "what about the feds." The $500k exclusion applies to state and federal taxes. Neither one of them bothers to mention that what is owed on it is irrelevant. It's the difference between what they paid for it and any capital improvements, versus what it sells for, that establishes the capital gains and that is the amount that the exclusion applies to. The rest of Whipple's answer, however, is spot on. Inter-generational transfers while the parents are alive is almost without exception the worst possible way for parents to give assets of any kind to their children, from a tax standpoint. Get some estate planning advice in person. It will save thousands in the end.