Capital Gains Tax on Inherited Property: Stepped-Up Basis and 2026 Rates

When you sell property you inherited, capital gains tax on that inherited property applies only to the difference between what you sell it for and the property’s fair market value on the date the previous owner died. That date-of-death value becomes your tax basis, replacing whatever the decedent originally paid. Decades of built-in appreciation typically vanish in a single reset, and most heirs owe far less than the original owner would have.

How the Stepped-Up Basis Works

The IRS sets your starting value at the property’s fair market value on the date of death, not the original purchase price.¹ If your parent bought a house in 1985 for $80,000 and it was worth $450,000 when they passed away, your basis is $450,000. Sell it for $460,000 the next year and your taxable gain is $10,000, not the $380,000 that built up during their lifetime.

This is very different from receiving property as a gift while the giver is still alive. Gift recipients inherit the donor’s original cost basis and carry forward whatever the donor paid.² A parent who gives you a $500,000 stock portfolio they bought for $50,000 hands you $450,000 in potential taxable gain. Inheriting that same portfolio after death resets the basis to $500,000 and wipes the gain out.³

When the Adjustment Runs Downward

The reset isn’t always a windfall. Because the rule ties your basis to fair market value at death, an asset that lost value gets adjusted downward. If your uncle paid $300,000 for stock worth only $180,000 when he died, your basis is $180,000. You cannot claim a loss based on what he originally paid. The statute simply says “fair market value at the date of the decedent’s death” without distinguishing gains from losses.¹

Assets That Don’t Get a Stepped-Up Basis

A significant category of inherited assets, called income in respect of a decedent, carries the original owner’s tax liability forward. These are amounts that would have been taxed as ordinary income to the deceased if they had lived long enough to collect.⁴ The most common examples:

Traditional IRAs and 401(k) plans. Withdrawals are taxed as ordinary income to the beneficiary, just as they would have been to the original owner.
Pensions and annuities. Payments from employer-sponsored plans remain taxable when the beneficiary receives them.
U.S. savings bonds. Accrued interest the decedent never reported is taxable to the heir who cashes them.
Unpaid wages and commissions. Compensation the decedent earned but hadn’t received is taxable income to the estate or beneficiary.

An inherited IRA worth $500,000 does not get a stepped-up basis. Every dollar withdrawn is taxed as ordinary income to the beneficiary, often at higher rates than capital gains would be.

Getting the Valuation Right

The tax benefit is only as good as the valuation supporting it. For real estate, that usually means hiring a certified appraiser to produce a written report documenting fair market value as of the date of death. If the IRS questions your basis years later, a contemporaneous professional appraisal is your primary defense.

Publicly traded stocks and mutual funds are simpler. The basis is generally the average of the high and low trading prices on the date of death, which brokerages can usually provide.

The Alternative Valuation Date

An estate’s executor can elect to value all estate assets six months after the date of death instead of the date of death itself. The election is only available if it would reduce both the total value of the gross estate and the estate tax owed.⁵ Any property sold or distributed within that six-month window is valued as of the sale or distribution date instead. For estates below the federal filing threshold, which is $15 million per person in 2026, the election is rarely relevant because there is no estate tax to reduce in the first place.⁶

What to Keep

Whether or not the estate owes federal tax, hold onto the appraisal report, property tax assessments, brokerage statements from the date of death, and records of any improvements you make after inheriting. If the estate filed Form 706, the value reported on that return becomes your basis.⁷ You may not sell for years, and reconstructing a valuation later is far harder than getting it right now.

The Basis You’re Locked Into

When an estate is required to file Form 706, the executor must also file Form 8971 with the IRS and give each beneficiary a Schedule A showing the reported value of the property they received. That filing is due within 30 days after the Form 706 is filed or its due date, whichever comes first.⁸

Once the executor reports a value, you’re stuck with it. You cannot claim a higher basis on your own return than the value reported to the IRS. This is the consistency requirement, and violating it triggers a 20% accuracy-related penalty on any resulting underpayment. Overstate your basis by 200% or more and the penalty jumps to 40%.⁹ If you think the executor undervalued property, the time to raise it is during administration, not on your later return.

Calculating the Tax When You Sell

Your taxable gain is the sale price minus your stepped-up basis, minus allowable selling expenses. Inherit a home valued at $400,000, pay $5,000 in real estate commission, sell for $430,000, and your gain is $25,000. Deductible selling costs include agent commissions, title and legal fees, and transfer taxes you pay as the seller.⁷ If you sell for less than your basis, you can claim a capital loss only when the sale is arm’s-length with an unrelated buyer and you didn’t convert the property to personal use before selling.

Long-Term Rates Apply Immediately

Inherited property is automatically treated as a long-term capital asset regardless of how long you hold it. Even if you sell the day after receiving it, any gain qualifies for long-term rates.¹⁰ That is a meaningful advantage, since long-term rates are substantially lower than ordinary income rates for most taxpayers.

2026 Rates

Long-term capital gains are taxed at 0%, 15%, or 20% depending on total taxable income.¹¹ For 2026, the 0% rate applies to taxable income up to $49,450 for single filers and $98,900 for married couples filing jointly. The 15% rate covers income above those amounts up to $545,500 for single filers and $613,700 for married joint filers. Income above those thresholds is taxed at 20%.

Higher earners face an additional 3.8% Net Investment Income Tax. The surtax kicks in when modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married couples filing jointly.¹² Combined, the top federal rate on long-term capital gains reaches 23.8%.

Where the Sale Gets Reported

Report the sale on Form 8949, then carry the totals to Schedule D.¹³ In the basis column, enter the stepped-up fair market value. If you received a Schedule A from the executor, use the value shown there. Code “H” in column (f) indicates that the basis reported by the estate differs from what a brokerage reported on a 1099-B, which happens often with inherited assets.

Co-Ownership Changes the Math

How you and the deceased held title changes how much of the property gets a new basis.

Joint Tenancy

If you owned as joint tenants with right of survivorship, only the decedent’s half steps up. Your original half keeps its old basis. If you and your sibling each paid $100,000 for a property now worth $600,000 and your sibling dies, your half stays at $100,000 while the inherited half resets to $300,000. Combined basis: $400,000, not $600,000.

Community Property States

Nine states follow community property rules, with a few others offering opt-in systems. In these states, when one spouse dies, the entire property, including the surviving spouse’s half, gets a basis reset to fair market value.¹⁴ The full reset applies as long as at least half of the community property interest is included in the deceased spouse’s gross estate.¹

A couple in a community property state who bought their home decades ago for $150,000, now worth $900,000, would see the entire basis reset to $900,000 at the first spouse’s death. In a non-community-property state with joint tenancy, only half resets, leaving the survivor with a combined basis of $525,000 and $375,000 of potential gain on their own half. How the deed is structured can mean tens of thousands of dollars in tax.

Inherited Rental Property

Rental property gets one of the strongest benefits from the reset. During the original owner’s lifetime, depreciation deductions likely pushed their basis well below what they paid. If they had sold, that depreciation would have been recaptured and taxed. When the property passes through an estate, the stepped-up basis replaces the depreciated basis, and the prior depreciation effectively disappears. You start fresh, with a new basis and a new depreciation schedule against future rental income. For families holding rental real estate over decades, inheriting rather than receiving a lifetime gift can save significant amounts in recapture alone.

Moving Into an Inherited Home

If you inherit a home and make it your primary residence, you may eventually qualify for the same capital gains exclusion available to any homeowner: up to $250,000 in gain excluded for single filers, or $500,000 for married couples filing jointly. You must personally own and live in the home for at least two of the five years before the sale. Time the deceased spent living there does not count toward your two-year requirement.⁷

For most heirs the stepped-up basis already erases most of the built-in gain, so the exclusion matters less. But if values climb after you inherit and you plan to hold the home, moving in could shelter additional appreciation.

Surviving spouses get a more favorable rule. If your spouse dies and you sell within two years of their death without remarrying, you can qualify for the full $500,000 exclusion, and you can count the time your late spouse owned and lived in the home toward the two-year tests.⁷

State Taxes Are a Separate Question

Federal capital gains tax is only part of the picture. Most states tax capital gains as ordinary income, which can add a significant layer on top of the federal bill. A handful of states impose no income tax at all, and one taxes only capital gains while exempting other income. Some states also impose their own estate or inheritance taxes with exemption thresholds far lower than the federal $15 million. An estate that owes nothing federally could still face a state-level bill, so checking your state’s rules before selling is worth the effort.

1
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
2
Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust
3
Internal Revenue Service. Frequently Asked Questions on Gifts and Inheritances
4
Internal Revenue Service. Survivors, Executors, and Administrators (Publication 559)
5
Office of the Law Revision Counsel. 26 USC 2032 – Alternate Valuation
6
Internal Revenue Service. Whats New – Estate and Gift Tax
7
Internal Revenue Service. Publication 523 – Selling Your Home
8
Internal Revenue Service. Instructions for Form 8971 and Schedule A
9
Office of the Law Revision Counsel. 26 US Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments
10
Office of the Law Revision Counsel. 26 USC 1223 – Holding Period of Property
11
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
12
Internal Revenue Service. Net Investment Income Tax
13
Internal Revenue Service. Instructions for Form 8949
14
Internal Revenue Service. Publication 555 – Community Property