In most cases, you can inherit a house tax free: the federal government does not treat an inherited home as income, the estate tax exemption shields all but the largest estates, and a rule called the stepped-up basis erases the capital gains that built up during the previous owner’s lifetime. Those three provisions do the heavy lifting. What follows is how each one works, where state law can change the answer, and the one common planning move that quietly destroys the tax-free result.
The House Itself Is Not Taxable Income
Receiving an inherited house is not a taxable event. You do not report the home’s value on your income tax return, and you owe no income tax simply because title transferred to you. This holds whether the property came through a will, a trust, or your state’s default inheritance rules.1Internal Revenue Service. Gifts and Inheritances
What the house produces after you inherit it is a different matter. Rental income is taxable in the year you receive it, and selling the home for more than its value on the date of death produces a taxable capital gain on the difference. The inheritance itself, though, triggers nothing.
The Stepped-Up Basis Does the Real Work
Your “basis” in a property is the number the IRS starts from when measuring your profit on a sale. When you buy a house, basis equals what you paid. When you inherit a house, basis resets to the home’s fair market value on the date the prior owner died.2Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
That reset is what makes a tax-free inheritance possible. Suppose a parent bought the house in 1990 for $120,000 and it was worth $480,000 the day they died. Your basis is $480,000. Sell it for $480,000 and your taxable gain is zero. Sell it for $510,000 and only the $30,000 above the date-of-death value is taxed. The $360,000 of appreciation that accumulated over three decades drops out of the picture entirely.
An executor can elect an alternate valuation date six months after death instead of the date-of-death value, but only if doing so reduces both the total estate value and the estate tax owed. The election is made on the estate tax return.3Office of the Law Revision Counsel. 26 USC 2032 – Alternate Valuation For families whose estate is nowhere near the federal threshold, this election never comes into play, and the date-of-death value governs.
Community Property States Step Up Both Halves
Married couples in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin get a stronger version of this rule. When one spouse dies, both halves of community property receive the stepped-up basis, not just the deceased spouse’s half.2Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent In other states, the surviving spouse’s share keeps its original cost basis, and only the deceased spouse’s share resets. That difference can be worth tens of thousands of dollars if the surviving spouse later sells.
Revocable Trusts Keep the Step-Up; Irrevocable Trusts Usually Don’t
A house held in a revocable living trust receives the same stepped-up basis as a house passing through a will. Because the grantor keeps control of a revocable trust during life, the IRS treats the trust assets as part of the grantor’s estate at death.
Irrevocable grantor trusts work differently. Under Revenue Ruling 2023-2, the IRS confirmed that assets transferred into an irrevocable grantor trust do not receive a stepped-up basis when the grantor dies. The trade-off is deliberate: the irrevocable trust removes assets from the grantor’s taxable estate, which can save estate tax for very wealthy families, but beneficiaries inherit the grantor’s original basis. If you are weighing one of these structures, that is a conversation to have with an estate planning attorney before signing anything.
The Federal Estate Tax Reaches Very Few Estates
Federal estate tax is paid by the estate itself before anything reaches the heirs. It is not a bill you receive personally. For 2026, the exemption is $15 million per individual, with a 40% top rate on amounts above that line.4Internal Revenue Service. Estate Tax Married couples can shield up to $30 million combined. Fewer than 1 in 1,000 estates owes any federal estate tax.
The One, Big, Beautiful Bill Act, signed on July 4, 2025, made the higher exemption permanent and removed the scheduled sunset. The $15 million figure continues to adjust for inflation each year.5Internal Revenue Service. One, Big, Beautiful Bill Provisions
Portability for a Surviving Spouse
When the first spouse dies without using the full $15 million exemption, the unused portion can transfer to the surviving spouse through portability. The surviving spouse then has their own exemption plus the deceased spouse’s leftover amount.6Internal Revenue Service. Frequently Asked Questions on Estate Taxes
Portability is not automatic. The estate’s representative must file Form 706 to elect it, even if no tax is owed. The regular deadline is nine months after death with an automatic six-month extension. Revenue Procedure 2022-32 allows a simplified late election if the return is filed within five years of the death.7Internal Revenue Service. Revenue Procedure 2022-32 Miss the five-year window and the unused exemption is gone for good. If your spouse recently died with significant assets, this is worth raising with the estate’s advisor even if there is clearly no tax due today.
State Estate and Inheritance Taxes Can Still Apply
Twelve states and the District of Columbia impose an estate tax, six states impose an inheritance tax, and Maryland imposes both.8Tax Policy Center. How Do State and Local Estate and Inheritance Taxes Work A state estate tax works like the federal version, calculated on total estate value and paid by the estate. A state inheritance tax is calculated on what each individual heir receives and paid by that heir.
State exemption thresholds are often far below the federal $15 million. Some begin at $1 million. States that impose an inheritance tax typically exempt surviving spouses completely and give the lowest rates to children and grandchildren, with higher rates applying to more distant relatives and unrelated beneficiaries. Whether any state tax applies depends on where the deceased lived and, in some cases, where the property sits, so check your state’s rules if the estate is close to the state threshold.
Selling the House Without Owing Tax
Because of the stepped-up basis, many heirs sell with little or no capital gains tax. The reporting mechanics matter, and there is one additional move that can shelter gains above the date-of-death value.
How to Report the Sale
You report the sale on Schedule D (Form 1040) and Form 8949. Write “INHERITED” in the date-acquired column on Form 8949 and report the transaction in Part II as long-term, regardless of how long you actually held the property.9Internal Revenue Service. Instructions for Form 8949 Even a sale a month after inheritance qualifies for the lower long-term capital gains rate.
Your basis is the fair market value on the date of death, and most heirs establish that with a professional appraisal. If the estate filed a federal estate tax return and you received Schedule A (Form 8971), you must use a basis consistent with the value reported on that form. Reporting a higher basis can trigger a 20% accuracy penalty on any underpayment.1Internal Revenue Service. Gifts and Inheritances
Moving In First to Stack the Primary Residence Exclusion
If you make the inherited house your primary residence and live there for at least two of the five years before selling, you can exclude up to $250,000 of gain ($500,000 for married couples filing jointly) on top of the stepped-up basis.10Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence That exclusion is the same one any homeowner can claim, and it stacks with the step-up. If the home appreciates substantially after the date of death, living in it for two years before selling can shelter that post-death appreciation as well.
Don’t Take the House as a Gift Instead
Families sometimes consider transferring a house during the owner’s lifetime to avoid probate. On the tax side, that is almost always the wrong move. A gifted house carries over the donor’s original basis to the recipient.11Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust
Using the same numbers from earlier: a house bought for $120,000 and now worth $480,000. If the owner gifts it to you, your basis is $120,000, and selling for $480,000 produces a $360,000 taxable gain. Inherit the same house and your basis is $480,000, so the same sale produces no tax. Depending on your income bracket and state, the difference easily reaches $50,000 or more.
The 2026 annual gift tax exclusion is $19,000 per recipient, so gifts up to that amount do not consume the donor’s lifetime exemption or require a gift tax return.12Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 A house is worth far more than that, so gifting one eats into the donor’s lifetime exemption and still hands the recipient the unfavorable carryover basis. For almost every family, letting the house pass at death produces the better tax outcome.
Costs That Come With the House Anyway
Inheriting a house tax free is not the same as inheriting it cost free. A few expenses tend to catch heirs off guard:
- A professional appraisal to establish date-of-death value, typically $400 to $1,500 depending on the property.
- Probate court filing fees, plus attorney and executor compensation that scale with the estate.
- Deed recording fees at the local recorder’s office, usually modest and jurisdiction-specific.
- Property taxes from the date of inheritance forward. Many states reassess the home at a change of ownership, which can raise the tax bill well above what the prior owner paid, particularly after a long holding period under a low assessed value.
- Homeowner’s insurance and ongoing maintenance. A vacant home may need a specialty vacancy policy, which costs more than standard coverage.
These are manageable when you plan for them. The real financial risk is letting an inherited home sit vacant and uninsured while probate works through, because that can erode the property’s value faster than any tax would.