Inheriting a house does not, by itself, create a capital gains tax bill. Tax comes into the picture only if you sell the home, and even then, capital gains tax on an inherited house is calculated from the property’s value on the date the prior owner died rather than what they originally paid for it. That reset is called the stepped-up basis, and for most heirs it eliminates decades of appreciation from the tax math. A quick sale near the date-of-death value often produces a small taxable gain or none at all.
How the Stepped-Up Basis Resets Your Cost
When you inherit real estate, the IRS treats your starting cost as the property’s fair market value on the date of the decedent’s death, not the price they paid.1Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent “Basis” is simply the tax term for that starting cost. If your parent bought a house in 1985 for $90,000 and it was worth $400,000 when they died, your basis is $400,000. The $310,000 of appreciation during their lifetime disappears from the tax ledger.
The rule applies to property received by bequest, devise, or inheritance, including property that passed through a revocable living trust.1Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent Establishing that fair market value usually means getting a professional appraisal at or near the date of death. Appraisers look at location, condition, size, and recent comparable sales. Order the appraisal early. Reconstructing a value years later is harder and more likely to draw IRS scrutiny.
The adjustment can also work downward. If the property lost value before the owner died, your basis steps down to that lower figure. Say your uncle paid $350,000 for a home worth only $280,000 when he died. Your basis is $280,000, and a sale above that produces a taxable gain even if the price is still below what he originally paid. Many heirs assume they have an automatic loss in that situation. They don’t.
Calculating the Gain When You Sell
The math is straightforward: sale price, minus selling expenses, minus your adjusted basis. What’s left is your capital gain or loss.2Internal Revenue Service. Topic No. 409, Capital Gains and Losses
Suppose you inherit a house with a stepped-up basis of $400,000. Eighteen months later you sell for $450,000 and pay $20,000 in agent commissions, transfer taxes, and closing costs. Your capital gain is $30,000: $450,000 minus $20,000 in expenses minus the $400,000 basis.
Selling expenses that reduce the taxable gain include real estate agent commissions, title insurance, legal fees, and state or local transfer taxes.3Internal Revenue Service. Publication 550, Investment Income and Expenses Routine carrying costs while you own the property, such as property taxes, insurance, and utilities, do not increase your basis and cannot be subtracted from the sale price. Property taxes you paid may be deductible on Schedule A subject to the $10,000 state and local tax cap, but they do not touch the capital gains calculation.
Capital Improvements Raise Your Basis
Permanent improvements you make after inheriting the home add to your adjusted basis and shrink your eventual gain. A new roof, a kitchen renovation, an added bathroom, or a replacement HVAC system all qualify.4Internal Revenue Service. Publication 523, Selling Your Home Routine maintenance like painting or fixing a leaky faucet does not. The dividing line is whether the work adds value, prolongs the home’s useful life, or adapts it to a new use. Keep receipts. If you put $35,000 into a new kitchen on that $400,000-basis house, your adjusted basis rises to $435,000, and the same $450,000 sale after $20,000 in expenses produces a loss rather than a gain.
What Rate Applies to the Gain
Inherited property automatically qualifies for long-term capital gains treatment, even if you sell the day after the person died. Federal law treats any inherited asset with a stepped-up basis as held for more than one year, regardless of your actual ownership period.5Office of the Law Revision Counsel. 26 U.S. Code 1223 – Holding Period of Property Long-term rates are meaningfully lower than the ordinary income rates that hit short-term gains.
For 2026, the long-term capital gains brackets are:
- 0% on taxable income up to $49,450 (single) or $98,900 (married filing jointly)
- 15% on taxable income from $49,451 to $545,500 (single) or $98,901 to $613,700 (married filing jointly)
- 20% on taxable income above $545,500 (single) or $613,700 (married filing jointly)
These brackets apply to your total taxable income, not the gain alone. A single filer with $40,000 in other taxable income and a $30,000 inherited-property gain may find part or all of the gain sitting in the 0% bracket.
The 3.8% Net Investment Income Tax
Higher-income heirs face an additional 3.8% surtax on net investment income, capital gains from a home sale included. The tax applies when your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly). Those thresholds are not indexed for inflation. If a large gain pushes you above the line, the 3.8% applies to the lesser of your net investment income or the amount by which your income exceeds the threshold.
If You Move In: The Section 121 Exclusion
If you make the inherited home your principal residence, you can potentially exclude up to $250,000 of gain ($500,000 for a married couple filing jointly) under Section 121. To qualify, you must own and use the home as your primary residence for at least two of the five years before selling.6Office of the Law Revision Counsel. 26 U.S. Code 121 – Exclusion of Gain From Sale of Principal Residence The two years do not need to be consecutive, but they must total at least 24 months within that five-year window.
A surviving spouse who inherited from a deceased spouse and hasn’t remarried can count the late spouse’s ownership and use toward the two-year test.6Office of the Law Revision Counsel. 26 U.S. Code 121 – Exclusion of Gain From Sale of Principal Residence That allows a relatively quick sale that still qualifies for the exclusion.
Children and other non-spouse heirs get no such credit. You start fresh. To claim the exclusion, you need to actually move in and live there as your primary residence for two of the next five years. On a property that has appreciated well past its stepped-up basis, that residency can be worth hundreds of thousands in tax savings, but the IRS is looking for genuine residence, not a lightly kept-up address.
Selling at a Loss
If you sell for less than your stepped-up basis, whether you can deduct the loss depends on how the property was used. A personal residence or a vacant inherited home produces a non-deductible loss. Federal tax law does not allow losses on the sale of personal-use property.7Internal Revenue Service. Publication 544, Sales and Other Dispositions of Assets
Convert the home to a rental or other income-producing use before selling, and the loss may be deductible. The property has to be genuinely in service as a rental at the time of sale. The deductible loss is limited to the lesser of your adjusted basis or the fair market value at the time of conversion, minus the eventual sale price.7Internal Revenue Service. Publication 544, Sales and Other Dispositions of Assets Listing the property for rent a week before closing will not hold up. You need a real change in use with documentation to match.
Community Property States and the Double Step-Up
In the nine community property states, a surviving spouse can receive a basis step-up on the entire property, not just the deceased spouse’s half. For most jointly owned property outside community property, only the decedent’s share adjusts. Community property is different: both halves step up to fair market value at the date of death, provided at least half the property’s value is includible in the decedent’s gross estate.8Internal Revenue Service. Publication 555, Community Property
The benefit can be substantial. A couple that bought a home for $150,000 as community property and sees it appreciate to $500,000 by the first spouse’s death gives the surviving spouse a $500,000 basis in the whole home, not $325,000. A sale near that value produces little to no gain.
Reporting the Sale on Your Tax Return
Report the sale on IRS Form 8949, which feeds Schedule D on your Form 1040.9Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets Because inherited property gets long-term treatment, the sale goes in Part II (long-term transactions), and you enter “INHERITED” in the date-acquired column.10Internal Revenue Service. Instructions for Form 8949, Sales and Other Dispositions of Capital Assets
You’ll need:
- The address of the inherited home
- “INHERITED” in place of a date acquired
- The closing date of your sale
- Gross proceeds from the sale
- Cost basis: fair market value on the date of death
- Adjustments for selling expenses and any capital improvements
When multiple heirs inherit and sell together, each person reports a proportionate share of the proceeds, basis, and expenses on their own return. Two siblings each holding a 50% interest would each report half of everything on their individual Form 8949.
State Taxes Are a Separate Layer
Federal capital gains aren’t the whole picture. Most states with an income tax also tax capital gains, generally at ordinary income rates, and the rules vary considerably. A handful of states have no income tax at all.
A small number of states also impose an inheritance tax based on the heir’s relationship to the deceased. Spouses are typically exempt; more distant relatives and non-relatives can face higher rates. Inheritance tax is separate from any capital gains tax you would owe on a later sale. If you’re inheriting property in a state you don’t know well, check its rules before assuming the federal treatment covers everything.