When you sell property you inherited, federal tax applies only to the gain measured from the property’s value on the date the previous owner died, not from what they originally paid. This “stepped-up basis” rule usually shrinks the taxable amount, and sometimes eliminates it. Any gain is treated as long-term, so it’s taxed at the lower capital gains rates of 0%, 15%, or 20%. Depreciation on a rental, high income, state rules, and whether you lived in the home can all change the final bill. So the short answer to whether there are taxes on selling inherited property is: often yes, but usually far less than you’d expect.
Your Starting Number: The Stepped-Up Basis
Your tax basis is not what the decedent paid. Federal law resets the basis to the property’s fair market value on the date of death.1Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent If a parent bought a house for $80,000 in 1985 and it was worth $400,000 the day they died, your basis is $400,000. The $320,000 of appreciation that built up during their lifetime is simply gone from the tax picture.
For real estate, that fair market value normally comes from a professional appraisal done as close to the date of death as possible. For publicly traded stocks or mutual funds, it’s the closing market price on the date of death. Hold onto the documentation. That number anchors every gain calculation you’ll ever make on the property.
The rule cuts both ways. If the property lost value during the decedent’s lifetime, the basis resets down to fair market value at death, and you cannot claim a loss based on the decedent’s original purchase price.1Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent
Calculating the Gain
The math is simple: net sale proceeds minus your adjusted basis. A positive number is a taxable gain, a negative number is a loss.
Net sale proceeds are the sale price minus selling expenses like real estate commissions, title insurance, legal fees, and any transfer taxes you pay as the seller.
Adjusted basis starts with the stepped-up value at death and then moves in two directions:
- Add the cost of capital improvements you made after inheriting, such as a new roof, an addition, or a major renovation.
- Subtract any depreciation you claimed if you rented the property out. Depreciation reduces basis dollar for dollar, which increases the taxable gain at sale.
If your adjusted basis is higher than your net proceeds, you have a capital loss. That loss offsets other capital gains for the year. Any remainder reduces ordinary income by up to $3,000 ($1,500 if married filing separately), with excess losses carrying forward to future years.2Internal Revenue Service. Publication 544 (2025), Sales and Other Dispositions of Assets One important limit: if you used the inherited property as a personal residence rather than as an investment, a loss on the sale is not deductible.3Internal Revenue Service. Topic No. 409, Capital Gains and Losses
The Rate You’ll Pay
Any gain from selling inherited property counts as long-term, even if you sell the day after inheriting. Federal law automatically treats inherited assets as held more than one year.4Office of the Law Revision Counsel. 26 U.S. Code 1223 – Holding Period of Property That matters because long-term rates run well below ordinary income rates.
For 2026, the federal long-term capital gains brackets are: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% from those thresholds up to $545,500 (single), $613,700 (married filing jointly), or $579,600 (head of household).
- 20% above those upper thresholds.
Most heirs land in the 15% bracket. The 0% rate can apply if your income is modest or the gain itself is small. The gain stacks on top of your other income for the year, so a large sale can push part of what you earn into a higher bracket.
Extra Layers on Rentals and High Incomes
If you rented the inherited property out and claimed depreciation, the sale triggers a second tax layer. Depreciation you took after the date of death is recaptured at a flat 25% rate rather than at the standard long-term rate.3Internal Revenue Service. Topic No. 409, Capital Gains and Losses This is unrecaptured Section 1250 gain.
The gain gets split into two pieces. The portion equal to depreciation you personally claimed is taxed at 25%. The rest is taxed at 0%, 15%, or 20%. Depreciation the decedent claimed before death is not recaptured because the step-up already erased it. Getting this split wrong is a common source of overpayment or later IRS adjustment.
High earners face an additional 3.8% Net Investment Income Tax on the gain. It kicks in when modified adjusted gross income exceeds $250,000 (married filing jointly), $200,000 (single or head of household), or $125,000 (married filing separately).6Internal Revenue Service. Topic No. 559, Net Investment Income Tax The 3.8% applies to the lesser of your net investment income or the amount by which your MAGI exceeds the threshold. A big real estate sale can easily push someone over the line in the year of sale. The surtax is reported on Form 8960.7Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
If You Move Into the Home
If you make the inherited home your primary residence, you may be able to exclude up to $250,000 of gain ($500,000 for married couples filing jointly). You have to own and use it as your principal residence for at least two of the five years before the sale.8Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
This exclusion stacks on the stepped-up basis. Inherit a home worth $400,000, live in it two years, sell for $600,000, and your $200,000 gain falls entirely under a single filer’s $250,000 exclusion. Tax-free.
Surviving spouses get an extra break: the deceased spouse’s ownership and use period counts toward the two-year requirement.8Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence A partial exclusion is available if you sell before the two years for a job change, health reason, or other unforeseen circumstance.
Surviving Spouses and Co-Owners
How much of the property steps up depends on how it was owned and where it sits.
Community Property States
In the nine community property states, both halves of jointly held marital property step up when one spouse dies.1Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent A couple who bought a home for $200,000 that’s worth $600,000 at one spouse’s death leaves the survivor with a full $600,000 basis. This “double step-up” is one of the most valuable benefits of community property.
Common Law States
In the other states, only the decedent’s share of jointly held property steps up. Two spouses holding as joint tenants: one dies, only that half resets to fair market value. Using the same example, the survivor’s total basis becomes $400,000 ($100,000 in their original half plus $300,000 stepped up from the decedent’s half).
Non-Spouse Co-Owners
When you owned the property as joint tenants with someone other than a spouse, only the decedent’s fractional interest steps up. Your own share keeps its original basis. Your new total basis is what you started with plus the fair market value of the decedent’s interest.
State Taxes and Inheritance Taxes
Most states that tax income also tax capital gains, so expect a state-level bill on top of the federal one. Rates vary, and a handful of states impose no income tax at all. A few states do not follow the federal stepped-up basis rule exactly, so check yours before relying on the federal number.
Five states impose a separate inheritance tax on the recipient: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. These are based on what you inherit and your relationship to the decedent, not on whether you sell. Close relatives like spouses and children are typically exempt or taxed at reduced rates.
The federal estate tax is a different matter and one most heirs never touch. It’s paid by the estate, not by you, and the 2026 exemption is $15,000,000 per person, so the overwhelming majority of estates owe nothing.9Internal Revenue Service. What’s New – Estate and Gift Tax If the estate did owe it, that liability was settled before you received the property and has no effect on your personal return.
Reporting the Sale
The closing agent or broker sends a 1099. For real estate, it’s Form 1099-S, reporting gross sale proceeds.10Internal Revenue Service. About Form 1099-S, Proceeds From Real Estate Transactions For securities, it’s Form 1099-B.11Internal Revenue Service. About Form 1099-B, Proceeds From Broker and Barter Exchange Transactions The IRS gets a copy either way.
You report the sale on Form 8949, in Part II for long-term transactions, and write “INHERITED” in the date-acquired column. Enter the stepped-up basis in the cost-basis column. Because the 1099 usually doesn’t report basis, you have to supply it. Leaving it blank defaults the basis to zero and vastly overstates the gain. This is the single most common heir-filing mistake. Form 8949 totals flow to Schedule D, and Schedule D flows to Form 1040.12Internal Revenue Service. Instructions for Form 8949 (2025)
Report the sale even if the stepped-up basis wipes out the gain entirely. The IRS receives the 1099 showing gross proceeds and has no way to know your basis unless you tell them. Skip the reporting and you can expect a notice assessing tax on the full sale price. The failure-to-file penalty is 5% of unpaid tax per month, up to 25%, with a minimum penalty for returns more than 60 days late of $525 or 100% of the tax due, whichever is less.13Internal Revenue Service. Failure to File Penalty Interest runs from the original due date until you pay. Filing correctly the first time avoids all of it.