When you sell property you inherited, capital gains tax applies only to the increase in value between the date the previous owner died and the date you sell. Your starting value resets to the property’s fair market value on the date of death, so decades of appreciation during the previous owner’s lifetime never get taxed. The federal rate on whatever gain remains is 0%, 15%, or 20%, depending on your total taxable income. Heirs who sell soon after inheriting often owe little or nothing.
The Stepped-Up Basis Is Why the Bill Is Usually Small
Your basis in inherited property is its fair market value on the day the previous owner died, not what they originally paid.1Office of the Law Revision Counsel. 26 US Code 1014 – Basis of Property Acquired From a Decedent If your parent bought a house for $60,000 in 1985 and it was worth $450,000 on the date they died, your basis is $450,000. Tax applies only to the difference between $450,000 and your eventual sale price.
This is very different from receiving the same property as a gift while the owner was still alive. A lifetime gift carries the donor’s original purchase price forward as your basis, exposing the entire history of appreciation to tax.2Office of the Law Revision Counsel. 26 US Code 1015 – Basis of Property Acquired by Gifts and Transfers in Trust With an inheritance, that history disappears.
Two side notes on the basis figure itself. First, if the property lost value in the six months after death, the estate’s executor may have elected to use that later valuation date on Form 706; that election, if made, becomes your basis too.3Office of the Law Revision Counsel. 26 US Code 2032 – Alternate Valuation4Internal Revenue Service. Instructions for Form 706 Ask the executor which date was used before you start calculating. Second, if the estate was large enough to file a federal estate tax return and you received a Schedule A to Form 8971, you must use the value shown on that schedule.5Internal Revenue Service. Gifts and Inheritances Most estates fall below the threshold and this never comes up.
The Rate You Pay
Any gain on inherited property is automatically long-term, no matter how quickly you sell. Federal law treats inherited property as having been held for more than one year, even if you close the sale the week after the funeral.6Internal Revenue Service. Publication 544 – Sales and Other Dispositions of Assets Long-term rates are lower than the rates on ordinary income.
For 2026, the federal long-term capital gains brackets are:
- 0% on taxable income up to $49,450 for single filers, $98,900 for joint filers, or $66,200 for heads of household.
- 15% on taxable income above those amounts up to $545,500 single, $613,700 joint, or $579,600 head of household.
- 20% on taxable income above the upper thresholds.
Most heirs land in the 0% or 15% band, and many owe nothing because the stepped-up basis leaves little gain to tax.
The 3.8% Surtax on Higher Incomes
An additional net investment income tax of 3.8% applies once your modified adjusted gross income clears $200,000 for single filers, $250,000 for joint filers, or $125,000 for married filing separately.7Internal Revenue Service. Net Investment Income Tax A large gain from selling an inherited home can push you over these lines in the year of the sale even if your ordinary income normally sits below them. At the top, that brings the effective federal rate to 23.8%.
Working Out What You Actually Owe
The formula is simple: sale price, minus adjusted basis, minus selling expenses, equals your taxable gain. Getting each piece right is where heirs stumble.
Document the Date-of-Death Value
Get a written appraisal from a qualified appraiser, and make sure the appraisal values the property as of the date of death, not the day the appraiser walks through. A residential appraisal usually runs a few hundred to over a thousand dollars. Skipping it is a false economy: without a credible valuation, you have no way to defend your basis if the IRS raises questions years later.
Add Any Capital Improvements You Make
Improvements you make after inheriting increase your basis and reduce your eventual gain.8Office of the Law Revision Counsel. 26 USC 1016 – Adjustments to Basis A new roof, updated plumbing, an addition, a kitchen renovation — projects that add value or extend the property’s life all qualify. Routine maintenance like painting, patching drywall, or fixing a leaky faucet does not. Keep every receipt.
Subtract Selling Costs
Real estate commissions, advertising, legal fees, and any transfer taxes you pay as the seller come off the gain before tax is calculated.9Internal Revenue Service. Publication 523 – Selling Your Home Your closing disclosure itemizes most of them. On a $400,000 sale with a 5% commission, that alone knocks $20,000 off your gain.
A Worked Example
Say your stepped-up basis is $350,000. You put in $25,000 for a new roof and HVAC, so your adjusted basis becomes $375,000. You sell for $430,000 and pay $26,000 in commissions and closing costs. The taxable gain is $430,000 minus $375,000 minus $26,000, or $29,000. At 15%, that’s about $4,350 in federal tax. Without the step-up, the same sale on a home bought decades earlier could have produced a six-figure bill.
Living in the Home Before Selling
If you move into the inherited home and make it your main residence, you can shelter a large slice of any gain under Section 121. The exclusion is up to $250,000 for single filers, or $500,000 for married couples filing jointly.10Office of the Law Revision Counsel. 26 US Code 121 – Exclusion of Gain From Sale of Principal Residence Stacked on top of the stepped-up basis, that combination can wipe out the tax on the sale entirely.
To qualify, you must have owned and used the property as your main home for at least two of the five years before the sale. The two years don’t have to be consecutive; they just have to add up to 24 months inside the 60-month window.10Office of the Law Revision Counsel. 26 US Code 121 – Exclusion of Gain From Sale of Principal Residence For the full $500,000 married exclusion, both spouses must meet the use test; only one has to meet ownership.
Selling Before Two Years Are Up
A partial exclusion is available if the sale is forced by a qualifying reason: a job relocation at least 50 miles farther from the home than your old workplace, a health-related move for you or a family member, or an unforeseeable event such as divorce, job loss, or destruction of the home.9Internal Revenue Service. Publication 523 – Selling Your Home The exclusion is prorated by how much of the two-year requirement you completed. Twelve months in gets you up to half.
Selling at a Loss
If the property sells for less than your stepped-up basis, the deductibility of the loss depends on how you used the home. Loss on a personal residence is not deductible.11Internal Revenue Service. Capital Gains, Losses, and Sale of Home The IRS treats personal-use property that way across the board.
If you never moved in and never used the property personally, the loss can be deductible. The sale has to be arm’s-length with an unrelated buyer; selling to a sibling, to the estate, or to another beneficiary disqualifies the loss. When it qualifies, report it on Form 8949 and Schedule D, where it can offset other capital gains or, within limits, reduce ordinary income.
Inherited Rental Property
If the home was a rental, the step-up wipes out the previous owner’s accumulated depreciation. You do not inherit their depreciation recapture, which would otherwise be taxed at up to 25% — meaningfully higher than the long-term capital gains rate.
New exposure begins with you. Any depreciation you claim after inheriting creates its own recapture liability when you sell, and that portion of the gain is taxed at the 25% recapture rate rather than the ordinary long-term rate. That isn’t a reason to skip the deduction while you hold the property, but it changes the math when you decide to sell.
Reporting the Sale
Report the sale on Form 8949. List the property description, the sale date, the sale price, and your basis, and enter “Inherited” in the date-acquired field so the IRS treats the gain as long-term.12Internal Revenue Service. Instructions for Form 8949 The totals carry over to Schedule D of your Form 1040.
The closing agent will typically file Form 1099-S reporting the gross proceeds, and the IRS gets a copy.13Internal Revenue Service. Instructions for Form 1099-S Match your return to that number. Mismatches are among the most common reasons for an automated IRS notice.
The return is due April 15 of the year after the sale.14Internal Revenue Service. When to File You can get an automatic six-month extension to file, but the extension does not extend the payment deadline; any tax owed is still due April 15.15Internal Revenue Service. Get an Extension to File Your Tax Return Filing late without an extension triggers a failure-to-file penalty of 5% of the unpaid tax per month, capped at 25%.16Internal Revenue Service. Failure to File Penalty Interest on unpaid tax runs from the original due date regardless of whether you filed for an extension.17Internal Revenue Service. Topic No. 653, IRS Notices and Bills, Penalties and Interest Charges
State tax is separate. Many states impose their own capital gains tax on top of the federal amount, rates and rules vary widely, and a handful of states have no income tax at all. Check with your state’s tax authority before you finalize the numbers.