If you sell property you inherited, you’ll generally owe federal capital gains tax only on the increase in value between the date the previous owner died and the date you sell, not on the full appreciation that built up during their lifetime. This is because of a rule called the stepped-up basis. For heirs who sell relatively soon after inheriting, the taxable gain is often small, and in some cases there’s no tax owed at all.
Why Your Taxable Gain Is Smaller Than You Think
When you buy property yourself, your “basis” (the starting value the IRS uses to measure your profit) is what you paid. Inherited property works differently. Federal law resets your basis to the property’s fair market value on the date the previous owner died.1Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent That reset effectively erases all appreciation that occurred during the decedent’s lifetime.
Say your mother bought a house in 1985 for $90,000 and it was worth $400,000 when she passed away. Your basis isn’t $90,000. It’s $400,000. If you sell for $415,000, you report a $15,000 gain rather than a $325,000 gain.
Establishing fair market value at the date of death usually calls for a professional appraisal. For a single-family home, expect to pay a few hundred dollars; complex or high-value properties cost more. Probate records or an estate tax return (Form 706) may also document the value. Keep whatever you use. The IRS can ask for it years later.2Internal Revenue Service. Publication 551, Basis of Assets
Calculating What You Owe
The formula is simple: sale price minus adjusted basis minus selling expenses equals your capital gain.
Your basis doesn’t stay frozen at the date-of-death value. Two things move it.
Lasting improvements you make after inheriting (a new roof, a kitchen remodel, an added bathroom) get added to your basis.2Internal Revenue Service. Publication 551, Basis of Assets If your stepped-up basis is $400,000 and you spend $30,000 on a renovation before selling, your adjusted basis becomes $430,000. Routine maintenance and repairs (fixing a leaky faucet, repainting) don’t count. The improvement needs to add value, extend useful life, or adapt the property to a new use.
Selling expenses come off the top as well. Real estate commissions, title insurance, transfer taxes, and legal fees tied to the sale all reduce the gain you report.3Internal Revenue Service. Publication 550, Investment Income and Expenses On a $500,000 sale with a 5% agent commission, that’s $25,000 before the IRS calculates anything. Your closing statement itemizes every deductible cost, so keep it.
2026 Capital Gains Tax Rates on Inherited Property
Any gain is treated as a long-term capital gain no matter how briefly you held the property. Even a sale the day after inheriting qualifies for long-term treatment.4Office of the Law Revision Counsel. 26 USC 1223 – Holding Period of Property That gives you the preferential long-term rates. For 2026:5Internal Revenue Service. Revenue Procedure 2025-32
- 0% rate on taxable income up to $49,450 (single), $98,900 (married filing jointly), or $66,200 (head of household).
- 15% rate on taxable income from $49,451 to $545,500 (single), $98,901 to $613,700 (married filing jointly), or $66,201 to $579,600 (head of household).
- 20% rate on taxable income above those 15% ceilings.
These thresholds apply to your total taxable income, not just the gain. A large sale can push you into a higher bracket for the year, so your gain may be split across two rates.
The 3.8% Net Investment Income Tax
Higher earners face an additional 3.8% surtax on net investment income, which includes capital gains from inherited property. It kicks in when your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly).6Internal Revenue Service. Net Investment Income Tax These thresholds aren’t adjusted for inflation; they’ve been the same since 2013. Combined with the 20% top rate, the effective maximum federal rate on a large gain is 23.8%.
Living in the Home Before You Sell
If you inherit a home and move in, you may qualify to exclude up to $250,000 of gain ($500,000 for married couples filing jointly) when you eventually sell.7Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence You need to have owned and used the home as your principal residence for at least two of the five years before the sale. The decedent’s time living there doesn’t count toward your use requirement. You personally need those two years.
Stacked on top of the stepped-up basis, this exclusion often erases the tax entirely. If your stepped-up basis is $400,000 and you live in the home two years before selling at $600,000, your $200,000 gain falls well inside the $250,000 exclusion.
Surviving Spouse Rules
Surviving spouses get two extra breaks. Your period of ownership and use includes your deceased spouse’s time in the home, so you may already meet the two-year test the day you inherit.7Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence And if you sell within two years of your spouse’s death and haven’t remarried, you can claim the full $500,000 exclusion rather than the $250,000 single-filer limit.8Internal Revenue Service. Publication 523, Selling Your Home That window closes quickly, which is worth weighing against the usual advice to avoid rushing a sale after a death in the family.
Selling at a Loss
Property values can drop between the date of death and the date of sale. Whether a loss is deductible depends on how the property was used.
If the property was held for investment (a rental, vacant land you never lived in, inherited stocks), the loss is a deductible long-term capital loss.9Internal Revenue Service. Publication 544, Sales and Other Dispositions of Assets Capital losses offset capital gains dollar for dollar, and you can deduct up to $3,000 of net capital losses against ordinary income each year ($1,500 if married filing separately). Unused losses carry forward.
If the property was your personal residence or vacation home, the loss is not deductible. The IRS treats losses on personal-use property as nondeductible personal losses.9Internal Revenue Service. Publication 544, Sales and Other Dispositions of Assets An inherited beach house used as your vacation home and sold at a $50,000 loss produces zero tax benefit. The same loss on a rental would offset other gains or reduce your taxable income.
Reporting the Sale
At closing, the title company or attorney files Form 1099-S with the IRS reporting the gross sale proceeds.10Internal Revenue Service. Instructions for Form 1099-S You get a copy, and the IRS will expect to see the sale on your return even if nothing is taxable.
Report the sale on Form 8949 (Sales and Other Dispositions of Capital Assets). Enter “INHERITED” as the acquisition date in column (b) and report the transaction in Part II (long-term).11Internal Revenue Service. 2025 Instructions for Form 8949 List the sale price, your stepped-up basis, and any adjustments for selling expenses. Totals from Form 8949 flow to Schedule D (Form 1040), which calculates your overall gain or loss.12Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets
Hold on to your appraisal, closing statement, improvement receipts, and anything the estate sent you about basis. The Form 1099-S shows only the gross sale price. It doesn’t account for your basis or expenses, so the number on it will almost always look much larger than what you actually owe tax on.
State Taxes and Inheritance Taxes
Federal tax is only part of the picture. Many states tax capital gains as ordinary income, with rates that vary widely. A sale producing a modest federal bill can still generate real state liability.
Five states (Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania) also impose an inheritance tax on assets received from a deceased person.13Tax Foundation. Estate and Inheritance Taxes by State, 2025 Rates there depend on your relationship to the deceased; close relatives often pay lower rates or nothing. Inheritance tax applies when you receive the property, not when you sell it, so it’s separate from any capital gains tax on a later sale. A dozen states and the District of Columbia also impose their own estate taxes with lower exemption thresholds than the federal $15 million level, which can reduce what the estate passes to you in the first place.
One Caveat for Large Estates
Most estates don’t owe federal estate tax, thanks to the $15 million exemption in 2026 ($30 million for a married couple).14Internal Revenue Service. What’s New – Estate and Gift Tax If the estate was large enough to file Form 706, basis-consistency rules apply. The executor files Form 8971 and gives each beneficiary a Schedule A showing the value reported on the estate tax return, and you can’t claim a basis higher than that figure.15Internal Revenue Service. Instructions for Form 8971 and Schedule A Overstating your basis triggers a 20% accuracy-related penalty on the underpayment, or 40% if your reported basis is double or more the correct amount. If you inherited from a large estate, confirm you received a Schedule A before you calculate your gain.