Selling your parents’ home after inheriting it usually produces little or no federal tax, because the home’s tax basis resets to its fair market value on the date your parent died. That rule, called the stepped-up basis, wipes out the appreciation that built up during your parents’ lifetime.1Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent You only owe capital gains tax on the increase in value between the date of death and the date you sell, and that number is often small, zero, or negative. The taxes on the sale of a parent’s home are a separate matter from any estate or inheritance tax the estate itself might owe.
How the Stepped-Up Basis Works
Your basis is not what your parents paid. It is what the home was worth on the day the parent died.2Internal Revenue Service. Publication 551, Basis of Assets – Section: Inherited Property If your parents bought the house for $120,000 decades ago and it was worth $450,000 at death, your basis is $450,000. The $330,000 of appreciation that accrued during their lives never gets taxed.
Pin the number down with a date-of-death appraisal. If an estate tax return was filed, the value on that return generally controls. Otherwise, a retrospective appraisal ordered by the executor, or an appraisal done for state inheritance tax purposes, will do the job.2Internal Revenue Service. Publication 551, Basis of Assets – Section: Inherited Property A date-of-death appraisal typically runs $400 to $1,200 depending on location and complexity. Keep it permanently. The IRS can question your basis years later, and the burden of proof is on you.
One wrinkle for a surviving parent: if your parents lived in a community property state and held the home as community property, both halves of the home get stepped up when the first spouse dies, not just the deceased spouse’s half.3Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent – Section: 1014(b)(6) In non-community-property states, only the deceased spouse’s share resets. That difference can be worth tens of thousands of dollars if the surviving parent sells.
Calculating the Gain or Loss
The math is simple. Take the sale price, subtract selling expenses, subtract your adjusted basis. What is left is your capital gain, or, if negative, your loss.
Your adjusted basis starts at the stepped-up value and goes up by the cost of capital improvements you make after inheriting. Improvements include additions like a bedroom or deck, major system upgrades like a new roof or central air, and interior work like a kitchen remodel or new flooring.4Internal Revenue Service. Selling Your Home – Section: Improvements Routine maintenance and one-off repairs do not count. Replacing every window in the house is an improvement; fixing a single cracked pane is not.
Selling expenses shrink the gain further. Real estate commissions, legal fees, title insurance, advertising, and transfer taxes at closing all qualify.5Internal Revenue Service. Selling Your Home – Section: Selling Expenses Loan origination fees, discount points, and lender-required appraisals do not.
What Tax Rate Applies
Inherited property is automatically long-term, no matter how quickly you sell.6Office of the Law Revision Counsel. 26 U.S. Code 1223 – Holding Period of Property – Section: 1223(9) That matters because long-term capital gains are taxed at lower rates than ordinary income. For 2026, federal long-term rates are 0%, 15%, or 20%. Single filers with taxable income up to $49,450 pay nothing on the gain; the 20% rate begins above $545,500. For married couples filing jointly, the 20% rate starts above $613,700.
Higher earners face an additional 3.8% net investment income tax on capital gains from real estate.7Internal Revenue Service. Net Investment Income Tax It applies when your modified adjusted gross income exceeds $200,000 single or $250,000 joint, and it is charged on the lesser of your net investment income or the amount your income runs over the threshold.8Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax Stacked on top of the 20% capital gains rate, the effective federal rate reaches 23.8% at the top.
Selling at a Loss
If the home lost value between the date of death and the sale, whether you can deduct the loss depends on how you used the property.
If you moved in or left it vacant as personal-use property, the loss is not deductible. You still report the sale, but you get no tax benefit from the shortfall.9Internal Revenue Service. Capital Gains, Losses, and Sale of Home That surprises people.
If you converted the home to a rental or held it strictly as an investment before selling, the loss is deductible. Investment-property losses offset capital gains dollar for dollar. If your losses exceed your gains for the year, up to $3,000 of the excess ($1,500 if married filing separately) offsets ordinary income, and any remainder carries forward.10Office of the Law Revision Counsel. 26 U.S. Code 1211 – Limitation on Capital Losses
A Special Rule for a Surviving Spouse
If you are the surviving parent selling the family home rather than a child who inherited, a separate exclusion can eliminate most or all of the gain. Under Section 121, an unmarried surviving spouse can exclude up to $500,000 of gain on the sale of a principal residence if the sale closes within two years of the deceased spouse’s death. Neither spouse can have used the exclusion on another home sale in the two years before the current sale. The surviving spouse can also count the deceased spouse’s ownership and use of the home toward the two-year requirements.11Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence – Section: 121(d)(2) Combined with the stepped-up basis, this usually means no tax at all. After the two-year window, the exclusion drops to the standard $250,000.
Children and other non-spouse heirs do not get this rule. A child could qualify for the $250,000 exclusion only after living in the home as a primary residence for two years, which most inheritors who sell relatively quickly will not do.
Reporting the Sale
The settlement agent at closing generally files Form 1099-S with the IRS reporting the gross proceeds, and sends you a copy.12Internal Revenue Service. Instructions for Form 1099-S (Rev. April 2025) Report the sale on your return even if the stepped-up basis leaves you with no tax owed.
On your return, the sale goes on Form 8949 and flows through to Schedule D. Because inherited property is long-term, it belongs on Part II of Form 8949, and you enter “INHERITED” in the date-acquired column instead of a specific date.13Internal Revenue Service. 2025 Instructions for Form 8949 List the sale price, your adjusted basis, and the gain or loss.
Hold onto the date-of-death appraisal, closing statement, improvement receipts, and selling-expense records for at least three years after filing. If the IRS disputes your basis, you are the one who has to prove it. A valuation misstatement that produces more than $5,000 of underpayment can bring a 20% accuracy penalty, which climbs to 40% for gross misstatements.14Internal Revenue Service. Publication 559 (2025), Survivors, Executors, and Administrators
Estate and Inheritance Tax Are Separate
Capital gains tax on the sale and estate tax on the transfer are different things, and most families never see both. The federal estate tax exemption for 2026 is $15 million per person, so a married couple can shield up to $30 million.15Internal Revenue Service. What’s New – Estate and Gift Tax When federal estate tax does apply, the estate pays it before assets are distributed, not the heir.
State rules vary. Roughly a dozen states and the District of Columbia impose their own estate tax, often with much lower thresholds than the federal one. A handful of states charge an inheritance tax that the heir pays, though children are frequently exempt or taxed at reduced rates. Maryland imposes both. If your parents lived in a state with either tax, check that state’s rules; a family that owes nothing federally can still owe at home.