When you sell property you inherited, you generally owe federal capital gains tax only on the appreciation that happened after the previous owner died, not on the full sale price and not on the decades of growth during their lifetime. That’s because of a rule called the stepped-up basis, which resets the property’s tax starting point to its fair market value on the date of death. For many heirs who sell soon after inheriting, the taxable gain is modest, and several exclusions can shrink it further or wipe it out entirely.
The Stepped-Up Basis Is Why Most Heirs Owe Little
Your “basis” is the starting value the IRS uses to measure your profit. If you buy a house, your basis is what you paid. If you inherit one, your basis resets to the property’s fair market value on the date the previous owner died.1Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent All the appreciation that built up during the decedent’s lifetime is effectively erased for tax purposes.
An example makes this concrete. Your mother bought a house in 1985 for $90,000, and it was worth $400,000 the day she died. Your basis isn’t $90,000. It’s $400,000. Sell for $415,000, and you have a $15,000 gain, not a $325,000 gain.
To lock in that stepped-up value, you need documentation of the fair market value at the date of death. A professional appraisal is the usual route; a single-family home typically runs a few hundred dollars. Probate filings or an estate tax return can also establish the number. Keep whatever you use, because the IRS can ask for it years later.2Internal Revenue Service. Publication 551, Basis of Assets
Married Couples in Community Property States Get More
If you’re a surviving spouse in a community property state, both halves of the property receive a stepped-up basis when the first spouse dies, not just the deceased spouse’s half.1Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent A home a couple bought for $200,000 that’s worth $600,000 at the first death gives the surviving spouse a $600,000 basis in the whole property. In non-community-property states, only the decedent’s half steps up. The difference can amount to tens or hundreds of thousands in tax savings, and it’s easy to miss.
Figuring Your Taxable Gain
The math is short: sale price, minus your adjusted basis, minus selling expenses, equals your capital gain (or loss). Your basis doesn’t stay frozen at the date-of-death figure, though. Two things move it.
Improvements you make add to your basis. A new roof, a kitchen remodel, an added bathroom — lasting improvements you pay for after inheriting get added on top of the stepped-up value.2Internal Revenue Service. Publication 551, Basis of Assets Routine maintenance and repairs don’t. The improvement has to add value, extend useful life, or adapt the property to a new use. If your stepped-up basis is $400,000 and you spend $30,000 on a renovation before selling, your adjusted basis is $430,000.
Selling expenses reduce your gain. Real estate commissions, title insurance, transfer taxes, and legal fees tied to the sale all come off the top.3Internal Revenue Service. Publication 550, Investment Income and Expenses On a $500,000 sale with a 5% agent commission, that’s $25,000 gone before any tax is calculated. Your closing statement itemizes everything you can deduct — keep it.
2026 Federal Capital Gains Rates
Any gain on inherited property is automatically treated as long-term, no matter how briefly you held it. Even a sale the day after inheriting qualifies.4Office of the Law Revision Counsel. 26 USC 1223 – Holding Period of Property Long-term status means access to the preferential capital gains brackets rather than ordinary income rates. For 2026:5Internal Revenue Service. Revenue Procedure 2025-32
- 0% on taxable income up to $49,450 (single), $98,900 (married filing jointly), or $66,200 (head of household).
- 15% on taxable income from those thresholds up to $545,500 (single), $613,700 (married filing jointly), or $579,600 (head of household).
- 20% on taxable income above those 15% ceilings.
These brackets apply to your total taxable income, not the gain in isolation. A large gain can push part of itself into the next rate, so a single sale may be split across two brackets.
A separate 3.8% net investment income tax applies on top when your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly).6Internal Revenue Service. Net Investment Income Tax Those thresholds are not adjusted for inflation and have been the same since 2013. Stacked with the 20% top rate, the maximum federal rate on a capital gain reaches 23.8%.
If You Live in the Home Before Selling, You May Owe Nothing
Move into an inherited home and make it your principal residence, and you can eventually exclude up to $250,000 of gain ($500,000 for married couples filing jointly) when you sell.7Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence The requirement is that you owned and used the home as your principal residence for at least two of the five years before the sale. The decedent’s time there doesn’t count toward your two years — those are yours to accumulate.
Combined with the stepped-up basis, this exclusion often eliminates the tax entirely. Stepped-up basis of $400,000, sale at $600,000 after two years living there — the $200,000 gain fits under the single-filer exclusion with room to spare.
Surviving Spouses Have Extra Room
If you’re a surviving spouse, your ownership and use include your late spouse’s time in the home, so you may already meet the two-year rule the moment you inherit.7Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence And if you sell within two years of your spouse’s death and haven’t remarried, you can still claim the full $500,000 exclusion rather than the $250,000 single-filer figure.8Internal Revenue Service. Publication 523, Selling Your Home That window closes fast, so factor it into any timing decision.
Selling at a Loss
Inherited property can sell for less than its stepped-up basis. Whether that loss saves you anything depends on how the property was used.
Investment property — a rental, vacant land you never lived on, inherited stock — generates a deductible long-term capital loss.9Internal Revenue Service. Publication 544, Sales and Other Dispositions of Assets The loss offsets capital gains dollar for dollar, and up to $3,000 of any excess ($1,500 if married filing separately) can offset ordinary income each year. Unused losses carry forward.
Personal-use property, including a home you moved into or a vacation house, produces a nondeductible loss.9Internal Revenue Service. Publication 544, Sales and Other Dispositions of Assets A $50,000 loss on an inherited beach house you used personally gives you no tax benefit; the same loss on a rental would. Character matters here.
Reporting the Sale
The closing agent will file Form 1099-S with the IRS reporting the gross sale proceeds, and you’ll get a copy.10Internal Revenue Service. Instructions for Form 1099-S The IRS expects to see the sale on your return even if you owe no tax.
Report the sale on Form 8949, listing “INHERITED” as the acquisition date in column (b), in Part II for long-term transactions.11Internal Revenue Service. 2025 Instructions for Form 8949 Enter the sale price, your stepped-up basis, and adjustments for selling expenses. Totals flow to Schedule D.12Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets
Hold onto your appraisal, closing statement, and receipts for improvements. The 1099-S shows only the gross sale price and never accounts for basis or costs, so the number on it will almost always look far larger than your actual gain.
One narrow caveat: if you inherited from an estate large enough to require filing a federal estate tax return (Form 706), the executor should give you a Schedule A from Form 8971 stating your basis, and you can’t claim a higher figure than what appears there.13Internal Revenue Service. Instructions for Form 8971 and Schedule A For 2026, the federal estate tax exemption is $15 million per person, so this only affects very large estates.14Internal Revenue Service. What’s New – Estate and Gift Tax
Don’t Forget State Taxes
Many states tax capital gains as ordinary income, and rates vary. A modest federal bill can be joined by a meaningful state one, so check your state’s treatment before you count the proceeds.
Separately, five states — Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania — impose an inheritance tax when you receive assets from a deceased person, with rates that depend on your relationship to the decedent.15Tax Foundation. Estate and Inheritance Taxes by State, 2025 That’s a separate cost from capital gains tax, and it applies when the property comes to you, not when you sell. A dozen states plus the District of Columbia also impose their own estate taxes with lower exemption thresholds than the federal level, which can reduce the value of what actually reaches you.