Capital Gains Tax on an Inherited House: A Guide to the Stepped-Up Basis

Selling an inherited house can trigger capital gains tax, but the rules are fundamentally different—and often more favorable—than selling a home you purchased yourself. The key difference is the stepped-up basis, which resets the property's value for tax purposes to its fair market value on the date of the original owner's death. This means you likely only pay taxes on the property's appreciation that occurs after you inherit it, not over the entire period the previous owner held it. Understanding this rule is critical for maximizing your financial outcome.

How Is Capital Gains Tax Calculated on an Inherited Property?

When you sell any asset for a profit, you owe capital gains tax—a tax on the profit or "gain." For a standard home sale, the gain is calculated by subtracting your original purchase price (your "basis") from the final sale price. However, for an inherited property, the Internal Revenue Service (IRS) uses the stepped-up basis.

The stepped-up basis is a tax provision that sets the property's cost basis to its fair market value at the time of the decedent's death. Your taxable gain is then calculated as the difference between the sale price and this new, stepped-up basis.

• Example: You inherit a home valued at $400,000 on the date of inheritance. You later sell it for $450,000. Your taxable gain is not the entire $450,000; it is only the $50,000 the property increased in value during your ownership.

What Is the Tax Rate for Selling an Inherited House?

The capital gains tax rate for inherited property depends on your income level and tax filing status. These are classified as long-term capital gains, regardless of how quickly you sell the property after inheriting it. The rates for the 2023-2024 tax years are generally 0%, 15%, or 20%.

Most taxpayers fall into the 15% bracket. It is important to consult with a tax professional to determine your specific rate based on your overall financial picture.

Can Home Improvements Lower My Tax Bill?

Yes, money spent on capital improvements can be added to your property's stepped-up basis, thereby reducing your taxable gain when you sell. A capital improvement is a modification that adds value to the home, prolongs its life, or adapts it to new uses—not simple repairs.

• Qualifying Improvements: Adding a new roof, renovating a kitchen, installing new windows, or adding a deck.
• Non-Qualifying Expenses: Basic repairs like painting, fixing a leaky faucet, or hiring a cleaning service.

Based on our experience assessment, keeping detailed records and receipts for all improvement projects is essential. You can subtract the total cost of these verifiable improvements from your capital gains.

What If I Sell the Inherited Home for a Loss?

If you sell the inherited property for less than its stepped-up basis, you have experienced a capital loss. This loss can be used to offset other capital gains you might have. If your losses exceed your gains, you can typically deduct up to $3,000 per year against your ordinary income, carrying any remaining loss forward to future tax years.

Are There Any Special Exclusions for Inherited Property?

Unlike when you sell your primary residence—where you may qualify to exclude up to $250,000 (or $500,000 for married couples) of capital gains—no such exclusion exists for the sale of an inherited property. The tax calculation is based solely on the stepped-up basis and the final sale price.

To navigate an inherited property sale successfully, focus on these key steps: establish the accurate stepped-up basis through a professional appraisal, meticulously document all capital improvements, and consult with a qualified tax advisor to understand your specific tax liability. This proactive approach ensures you meet your obligations while maximizing your financial return from the inheritance.