Does Selling an Inherited House Count as Taxable Income?

Selling an inherited house is not treated as ordinary taxable income on your federal return. The IRS handles it as a capital transaction, more like selling stock than earning a paycheck, and a rule called the step-up in basis usually erases most or all of the taxable gain for heirs who sell soon after the previous owner’s death. In many cases, you owe nothing. When you do owe, it’s capital gains tax on the appreciation that occurred after you inherited, not on the full sale price.

Why the Sale Isn’t Ordinary Income

When you sell any property, the IRS looks at the difference between your “basis” in the property and what you sold it for. That difference is the gain. Wages and salaries are taxed as ordinary income; gains on property are taxed under the capital gains rules, which use lower rates.

You didn’t buy the inherited house, so federal law resets its basis to the home’s fair market value on the date the previous owner died.¹ This is the step-up in basis. Decades of appreciation that built up during the previous owner’s lifetime are wiped off the tax slate.

An example makes the effect concrete. Say a parent bought a house for $80,000 in 1985, and it was worth $450,000 when they died. Your basis as the heir is $450,000, not $80,000. Sell it for $460,000, and your taxable gain is $10,000, not $380,000.

Documenting the Stepped-Up Value

An appraisal performed close to the date of death is the standard way to establish the new basis. Keep it with your permanent records; you’ll need it for the tax year you sell. If the estate was large enough to file a federal estate tax return (Form 706) and you received a Schedule A from that form, use a basis consistent with the value reported there.²

Improvements and Selling Costs Adjust the Basis

The date-of-death value isn’t a permanent ceiling on your basis. Lasting improvements you make after inheriting, such as a new roof, an addition, or a kitchen renovation, add to your basis.³ Routine repairs and maintenance don’t. Selling expenses like real estate commissions and transfer taxes reduce your net proceeds and, therefore, your taxable gain.²

The Rate If You Do Owe Tax

When an inherited home sells for more than its stepped-up basis, the profit is taxed as a long-term capital gain regardless of how long you held it. Federal rules treat inherited property as held more than one year even if you sell the day after inheriting.² Long-term rates are meaningfully lower than the ordinary income rates that apply to wages.

For the 2026 tax year, long-term capital gains are taxed at 0%, 15%, or 20% depending on your total taxable income and filing status:⁴

0% up to $49,450 (single), $98,900 (married filing jointly), or $66,200 (head of household)
15% above that, up to $545,500 (single), $613,700 (married filing jointly), or $579,600 (head of household)
20% above the 15% threshold

Because the step-up removes most or all of the gain for heirs who sell quickly, many owe nothing at all. Most of those who do owe fall in the 0% or 15% bracket.

The 3.8% Surcharge for Higher Incomes

Higher-income sellers may owe an additional 3.8% net investment income tax on top of the capital gains rate. It applies to the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds $200,000 for single filers, $250,000 for married couples filing jointly, or $125,000 for married individuals filing separately.⁵ These thresholds aren’t indexed for inflation. Gain from selling inherited real estate counts as net investment income for this tax, though any portion excluded under the primary residence rule below doesn’t.⁶

If You Move In Before Selling

Heirs who make the inherited home their primary residence for long enough can exclude a large chunk of any gain on top of the step-up. Federal law lets you exclude up to $250,000 of gain ($500,000 for married couples filing jointly) from the sale of a principal residence if you owned and lived in the home for at least two of the five years before the sale.⁷ The two years of ownership and two years of use don’t have to be consecutive; they need to total 24 months within the five-year window.⁸

If a home’s stepped-up value was $450,000 and you sell for $650,000 after living there three years, a single filer would exclude the entire $200,000 gain.

A partial exclusion is available if you sell before hitting two years because of a change in employment, health reasons, or certain unforeseen circumstances.⁷ The cap is prorated by how much of the two-year period you completed. One year of qualifying residence gets a single filer up to $125,000 of exclusion.

Selling at a Loss

Not every inherited home sells above its stepped-up basis. Whether a loss is deductible depends on how you used the property between inheriting and selling.

If you lived in the home or left it vacant for personal reasons, the loss isn’t deductible. Federal law doesn’t allow loss deductions on personal-use property.²
If you converted it to a rental or held it purely as an investment, the loss is deductible as a capital loss.⁹

A deductible capital loss first offsets other capital gains for the year. If losses exceed gains, you can deduct up to $3,000 of the excess against ordinary income ($1,500 if married filing separately), and any remaining loss carries forward to future years.¹⁰

Inheriting the House Isn’t Itself Income

Receiving the house doesn’t get reported as income. An inheritance, whether it’s a house, cash, or other assets, is generally not taxable to the person who receives it. Tax consequences arise only when you sell.

The federal estate tax is a separate matter and is paid by the estate, not by heirs. For 2026, the exemption is $15,000,000 per person, so estates below that owe no federal estate tax.⁴ Some states impose their own estate or inheritance taxes with much lower thresholds, and if the deceased lived in or owned property in one of those states, the estate or heirs may owe state-level tax regardless of the federal result. Most states also charge a real estate transfer tax at closing, which reduces your net proceeds and, in turn, your federal gain.

Reporting the Sale on Your Return

At closing, the title company or attorney typically reports the sale to the IRS on Form 1099-S and sends you a copy showing gross proceeds.¹¹ Getting the form doesn’t mean you owe tax. It means the IRS knows the sale happened and expects to see it on your return.

Report the sale on Form 8949 (Sales and Other Dispositions of Capital Assets). Put the sale proceeds in column (d) and your stepped-up basis in column (e). In column (b), for date acquired, write “INHERITED” rather than a specific date.¹² Because inherited property is automatically long-term, use Part II. Totals from Form 8949 flow to Schedule D of your Form 1040.

Keep these documents in case of an audit:

The date-of-death appraisal, which establishes your stepped-up basis.
The closing statement (HUD-1 or Closing Disclosure), showing the sale price and selling expenses.
Form 1099-S, reporting the gross proceeds.
Receipts for any improvements you made after inheriting.
Schedule A from Form 8971, if the estate filed a federal estate tax return.

1
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
2
Internal Revenue Service. Publication 544 – Sales and Other Dispositions of Assets
3
Internal Revenue Service. Publication 551 – Basis of Assets
4
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
5
Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax
6
Internal Revenue Service. Topic No. 559 – Net Investment Income Tax
7
Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
8
eCFR. 26 CFR 1.121-1 – Exclusion of Gain From Sale or Exchange of a Principal Residence
9
Internal Revenue Service. Capital Gains, Losses, and Sale of Home
10
Office of the Law Revision Counsel. 26 USC 1211 – Limitation on Capital Losses
11
Internal Revenue Service. Instructions for Form 1099-S – Proceeds From Real Estate Transactions
12
Internal Revenue Service. Instructions for Form 8949