Losing a loved one is never easy. And when you’re suddenly left with property in your name, the emotions of grief often mix with a lot of legal and financial questions—one of the biggest being: how is inherited property taxed when sold?
If you’ve found yourself in this situation, you’re not alone. Every year, thousands of people inherit homes, land, or other real estate—and many choose to sell. But before you stick a “For Sale” sign in the yard or sign on with a realtor, it’s important to understand how taxes come into play. Doing this right can save you thousands and give you peace of mind.
Let’s walk through what you need to know—without all the legal jargon.
First Things First: You’re Not Taxed for Just Inheriting It
Here’s a bit of good news: you don’t owe taxes just because you inherited the property. There’s no federal “inheritance tax” for recipients in most cases. However, when you sell the property, that’s where taxes may apply—specifically, capital gains tax.
But don’t worry, selling an inherited property isn’t taxed the same way as selling your personal home. One key rule actually works in your favor—and it’s called the “step-up in basis.”
What Is Step-Up in Basis?
Let’s break this down.
When someone buys a home, the amount they pay becomes their cost basis. If they later sell it for more, the profit (the “gain”) is subject to taxes.
But when you inherit a property, the IRS gives you a break. Instead of using the original purchase price, your basis “steps up” to the property’s market value at the time of the owner’s death.
For example:
- Your father bought a home 25 years ago for $100,000.
- When he passed, the home was worth $350,000.
- You inherit the home, and this $350,000 becomes your cost basis—not the $100,000 he paid.
If you sell the property for about that same amount soon after inheriting it, you likely won’t owe much (if anything) in capital gains tax.
So, How Is Inherited Property Taxed When Sold?
Let’s look at how this plays out step by step:
1. Find Out the Property’s Value at the Time of Death
You’ll want a fair estimate of the property’s market value on the date your loved one passed. If the estate went through probate, this might already be documented. Otherwise, hiring an appraiser—or at least getting a Comparative Market Analysis (CMA) from a real estate agent—can help establish a value.
This figure becomes your cost basis when you sell.
2. Subtract Your Basis From the Selling Price
Say you sell the home a few months later for $365,000. Your cost basis is $350,000. That means your gain is $15,000.
That gain is what gets taxed.
3. The IRS Treats All Gains as Long-Term
Here’s another advantage: even if you sell the inherited property right away, the IRS treats your profit as a long-term capital gain. This matters because long-term capital gains are taxed at lower rates than short-term ones.
Depending on your income, your federal capital gains tax rate could be 0%, 15%, or 20%.
4. Don’t Forget State Taxes
Some states also collect capital gains taxes, and their rates vary. If you’re selling an inherited property in a state with income or capital gains tax, you might owe state tax on the gain too.
It’s a smart move to check with a local tax professional just to be safe.
What If You Hold Onto the Property for a While?
If you don’t sell the property right away, any increase in value from the date of inheritance to the time you sell will be considered a gain.
Let’s say:
- You inherit the home at a value of $350,000.
- Five years later, you sell it for $450,000.
- You now have a $100,000 gain—and that’s what could be taxed.
It’s not necessarily a bad thing, especially if the real estate market is climbing. But it’s something to be aware of before you decide to hang on to the property long-term.
Improvements Can Change the Math
Did you make major improvements to the home before selling—like updating the kitchen, replacing the roof, or remodeling a bathroom? Good news: those expenses can increase your cost basis.
Keep your receipts. You may be able to subtract these improvement costs from your sale proceeds to reduce your taxable gain even more.
Just remember—regular maintenance like mowing the lawn or painting walls doesn’t count toward your cost basis.
What If You Sell at a Loss?
Sometimes, inherited property sells for less than its appraised value at the time of inheritance. If that happens, you might actually have a capital loss.
In certain cases, that loss can be used to offset other gains on your tax return—or even reduce your taxable income. Again, this is where a tax advisor can help you get the most out of your situation.
Reporting the Sale to the IRS
If you sell an inherited property, you’ll need to report it on your tax return using Schedule D and Form 8949. These forms help you show the IRS:
- When you sold the property
- The selling price
- Your cost basis
- Your gain (or loss)
Even if your gain is small or zero, it still needs to be reported.
A Few Quick Tips to Make It Easier
- Don’t wait too long to get a property appraisal. It’s easier to determine fair market value shortly after someone passes than years later.
- Keep good records—closing documents, repair receipts, and anything related to the sale.
- Talk to a tax professional before selling. Even if you only meet once, their advice can help you avoid costly mistakes.
- Understand probate, if it applies. Selling an inherited property may require waiting until probate is complete—depending on how the estate was set up.
How is inherited property taxed when sold?
How inherited property is taxed when sold depends on how much it’s worth when you inherit it and how much you sell it for. The stepped-up basis rule usually limits your tax burden, but the timing of the sale, any improvements you make, and where you live can all impact your final tax bill.
Inheriting property is a big responsibility, but selling it doesn’t have to be a nightmare. When you take time to understand the basics—or lean on a professional who does—you’ll be in a better position to protect your profit and move forward with confidence.
Need to Sell an Inherited Property Without the Hassle?
We work with families every day who are dealing with inherited homes. Whether you want to sell quickly, avoid costly repairs, or just get clear answers, we’re here to help. Reach out today for a no-obligation consultation.
Skip the hassle of dealing with taxes by selling your inherited house to a direct buyer like TMC Property Solutions.
TMC Property Solutions is a direct buyer./local house buyer specializing in distressed properties in Weatherford, Texas. We offer cash offers and can close quickly, so you can get back on your feet as soon as possible. Moreover, we are committed to helping homeowners in need and will work with you to make the selling process as easy as possible. There’s no need for repairs. We buy houses in any condition, and we offer a fair price, close in days, we buy in as-is condition, and we pay all your closing costs.
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If we can’t help you, we probably know someone who can, so call us today.