To report the sale of inherited property, list the transaction on Form 8949 in the long-term section, using the property’s fair market value on the date of the previous owner’s death as your cost basis, then carry the totals to Schedule D of your Form 1040. The stepped-up basis is the number that decides whether you owe tax, break even, or claim a loss, and heirs who mistakenly use the decedent’s original purchase price routinely overpay by thousands.
Start With the Stepped-Up Basis
Under Internal Revenue Code Section 1014, your basis in inherited property is the fair market value on the date the previous owner died, not what they paid for it.1Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent The rule covers real estate, stocks, bonds, and most other capital assets passed through a will, trust, or intestate succession.
An example makes the stakes clear. If your parent bought a house for $120,000 in 1990 and it was worth $380,000 the day they died, your basis is $380,000. Sell for $400,000 and your taxable gain is about $20,000 before selling expenses, not $280,000.
For real estate, a professional appraisal as of the date of death is the standard way to establish fair market value. For publicly traded stocks, use the closing price on the date of death, or the average of the high and low that day. If the estate filed a federal estate tax return (Form 706), the values reported there generally control your basis, and you cannot claim a higher number.
If the Executor Elected the Alternative Valuation Date
In some estates, the executor may elect under Section 2032 to value all assets six months after the date of death rather than on it. The election is available only when it decreases both the gross estate and the estate tax owed, and it is irrevocable once made on the estate tax return.2Office of the Law Revision Counsel. 26 U.S. Code 2032 – Alternate Valuation
If the election was made, your basis is the value at the six-month mark. Property sold or distributed before that anniversary uses its value on the date of the earlier transaction. Check with the executor before you calculate your gain.
Inherited Property Is Always Long-Term
Section 1223(9) automatically treats inherited assets as held for more than one year, even if you sell the day after the previous owner dies.3Office of the Law Revision Counsel. 26 U.S. Code 1223 – Holding Period of Property Every sale of inherited property qualifies for long-term capital gains rates, which are lower than the ordinary income rates that apply to short-term gains. On the reporting forms, inherited property always goes in the long-term section.
Filling Out Form 8949
Form 8949 (Sales and Other Dispositions of Capital Assets) is where you list each transaction, and Schedule D is where the totals combine to calculate your gain or loss.4Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets
Enter each inherited property sale in Part II (long-term transactions). Column (a) takes a short description, such as the street address of a home or the name and number of shares of a stock. In column (b), the date acquired, write the word INHERITED rather than a calendar date. That entry tells the IRS the asset qualifies for automatic long-term treatment. Column (c) is the actual closing or settlement date.
Column (d) is the gross sale price. For real estate, the closing agent typically reports this to you and the IRS on Form 1099-S. Column (e) is your cost basis: the stepped-up fair market value on the date of death, or the value at the alternative valuation date if the executor elected it. Column (f) takes an adjustment code if the basis reported to the IRS by a broker differs from your actual basis, or if other adjustments apply, with the corresponding dollar adjustment in column (g).5Internal Revenue Service. Instructions for Form 8949 (2025)
Account for Selling Expenses
Real estate commissions, title insurance, transfer taxes, and attorney fees reduce your taxable gain. Either subtract them from the proceeds you enter in column (d) or capture them through an adjustment in columns (f) and (g). Keep the settlement statement in case the IRS asks how you arrived at the number.
Then Carry Totals to Schedule D
The subtotals from Form 8949 flow to Schedule D, which combines your long-term and short-term transactions, applies the appropriate capital gains rates, and produces the figure that goes onto your Form 1040. File both forms with your return, electronically or on paper.
Match the Estate Tax Return If One Was Filed
If the estate was large enough to require Form 706, your basis in the inherited property cannot exceed the final value determined for estate tax purposes. The IRS calls this the consistent basis requirement, and violating it can trigger an accuracy-related penalty of 20% of the resulting underpayment.6Internal Revenue Service. Gifts and Inheritances The penalty doubles to 40% for gross valuation misstatements.7Office of the Law Revision Counsel. 26 U.S. Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments
Practically speaking, get a copy of the estate tax return before reporting the sale. If the executor reported the house at $380,000 on Form 706, you cannot claim a basis of $420,000 on your income tax return based on a different appraisal.
Inherited Retirement Accounts Are Reported Differently
Traditional IRAs and 401(k)s do not receive a stepped-up basis. Distributions from an inherited traditional IRA are taxed as ordinary income, the same way they would have been for the original owner, and they are not reported on Form 8949 or Schedule D. Qualified distributions from an inherited Roth IRA are generally tax-free. The reporting process in this article applies to capital assets such as real estate, stocks, and personal property.
When the Sale Produces a Loss
If the property lost value between the date of death and the date you sell, whether you can deduct the loss depends on how the property was used.
Investment property, such as inherited stock or a rental, produces a fully deductible capital loss. Losses offset capital gains first; if losses exceed gains, you can deduct up to $3,000 of the excess against ordinary income each year ($1,500 if married filing separately), carrying the rest forward.8Office of the Law Revision Counsel. 26 U.S. Code 1211 – Limitation on Capital Losses
A loss on personal-use property, including a home you or the decedent lived in, is not deductible.9Internal Revenue Service. Capital Gains, Losses, and Sale of Home To preserve the ability to deduct a potential loss on an inherited home, you would need to convert it to investment or rental use before selling; in that scenario, the basis for determining a loss is the lower of the stepped-up value at death or the fair market value at the time of conversion. Talk to a tax professional before making that move.
Filing and Keeping Records
Include Form 8949 and Schedule D with your Form 1040 for the year of the sale. Electronic filing catches common errors before submission and processes faster than paper.
The IRS advises keeping records related to property until the statute of limitations runs on the return that reports its disposition. For inherited property, hold onto the date-of-death appraisal, the estate tax return (if one was filed), settlement statements, and documentation of selling expenses for at least three years after you file the return reporting the sale.10Internal Revenue Service – IRS.gov. How Long Should I Keep Records If you claimed a loss or think the IRS might question your basis, keep them longer. A date-of-death appraisal is nearly impossible to recreate years later, and without one the IRS can substitute its own valuation.