You get a tax reset on inherited property, not a tax bill

When you inherit property, the IRS resets its tax value to what it was worth on the date of death — not what the previous owner paid for it. This is called a step-up in basis. If you sell the property soon after inheriting it, you owe capital gains tax only on the increase in value from the date of death forward, not on decades of appreciation the original owner saw. In many cases, you owe nothing at all because the property sells for roughly what it was worth when you inherited it.

The step-up applies automatically. You do not need to file a special form or take action to claim it. But you do need to know the property's value on the date of death, and you need to report that value correctly on your tax return if you later sell. Getting this wrong — or missing it — can cost you thousands in unnecessary tax.

Key Takeaways

  • Inherited property receives a step-up in basis to its fair market value on the date of death, which resets your starting point for capital gains tax.
  • If you sell inherited property within a year or two of inheriting it for roughly the same price, you typically owe little or no capital gains tax.
  • You must obtain a professional appraisal or use comparable sales data to establish the property's value on the date of death for your tax records.
  • The step-up applies to real estate, stocks, bonds, and most other assets, but not to retirement accounts like IRAs or 401(k)s.
  • If the estate was large enough to file a federal estate tax return, the property value used on that return is the basis you use for capital gains tax.

How the step-up in basis actually works

Suppose your parent bought a house in 1985 for $80,000. It is now worth $400,000. Your parent dies and leaves it to you. The step-up in basis means your tax starting point is $400,000, not $80,000. If you sell it three months later for $405,000, your capital gain is $5,000, not $325,000.

This applies to any asset: real estate, stocks, bonds, mutual funds, art, vehicles. The rule is the same. The IRS calls this the "date-of-death value" or "fair market value" on the date the person died. That becomes your basis — your cost for tax purposes — even though you paid nothing for it.

The step-up is permanent. You cannot lose it by waiting to sell. If you inherit the house and hold it for ten years, your basis is still the value on the date of death. Any appreciation after that date is what you owe tax on when you sell.

Establishing the property's value on the date of death

The IRS will not take your word for what the property was worth. You need documentation. For real estate, the most common approach is a professional appraisal performed by a licensed appraiser. The appraisal should be dated as close as possible to the date of death — ideally within 30 days. An appraisal typically costs $300 to $800 depending on the property and your location.

For stocks and bonds, the value is straightforward: use the closing price on the date of death (or the average of the high and low if the market was closed that day). Your brokerage statement from that date will show this. For real estate in areas where comparable sales data is readily available, you can sometimes use recent sales of similar properties instead of a full appraisal, though an appraisal is more defensible if the IRS questions your return.

Keep the appraisal or valuation document with your tax records. If you sell the property years later and report a small gain or no gain, the IRS may ask how you arrived at your basis. Having the contemporaneous appraisal protects you.

When you must report the inherited property on your tax return

If the estate was small — below the federal estate tax threshold, which is $13.61 million per person in 2024 — the executor does not file a federal estate tax return (Form 706). In that case, you do not need to report the property's date-of-death value to the IRS until you sell it. At that point, you report the sale on Schedule D (capital gains) and use the date-of-death value as your basis.

If the estate was large enough to require a federal estate tax return (Form 706), that return lists the property and its value on the date of death. The IRS uses that value as the official basis. When you later sell, you use the same value from the Form 706. If the executor filed Form 706, ask for a copy and keep it with your records.

Some states also require an estate tax return or inheritance tax return. Check with the executor or an estate attorney about your state's rules. The value reported on a state return should match the federal value.

The step-up does not explore to retirement accounts

IRAs, 401(k)s, 403(b)s, and similar retirement accounts do not receive a step-up in basis. When you inherit a traditional IRA or 401(k), you owe income tax on the full amount you withdraw, regardless of how long the original owner held it or what they paid into it. The step-up rule does not help you here.

Roth IRAs are different: withdrawals are tax-free, so there is no capital gains issue. But you still cannot step up the basis of a Roth IRA — the tax-free treatment is already built in.

If you inherit both real estate and retirement accounts, the step-up applies only to the real estate and other non-retirement assets. Plan your withdrawals from inherited retirement accounts carefully, because they count as ordinary income and can push you into a higher tax bracket in a single year.

Selling inherited property soon after inheriting it

Many people inherit property and sell it within a year or two. If the property has not changed much in value since the date of death, you will owe little or no capital gains tax. This is the most common scenario where the step-up provides real benefit.

Report the sale on Schedule D. List the date-of-death value as your basis and the sale price as your proceeds. The difference is your capital gain (or loss). If you inherited the property less than a year before selling, the gain is short-term and taxed at your ordinary income rate. If you held it longer than a year, it is long-term and taxed at the preferential capital gains rate (0%, 15%, or 20% depending on your income).

Keep records of the sale: the purchase agreement, the closing statement, and the appraisal or valuation you used to establish basis. These documents support your tax return if you are audited.

Holding inherited property for the long term

If you inherit a rental property or a home you plan to keep, the step-up still applies, but you need to track basis carefully over time. Your basis is the date-of-death value. Any improvements you make (a new roof, an addition, major repairs) increase your basis. Depreciation (if it is a rental) decreases your basis.

When you eventually sell, subtract your adjusted basis from the sale price to find your capital gain. The step-up means you start from a higher number than the original owner did, which reduces your taxable gain.

If you live in the property as your primary residence, you may also be able to exclude up to $250,000 of gain ($500,000 if married filing jointly) under the primary residence exclusion. This is separate from the step-up, but it often means you owe no capital gains tax at all when you sell an inherited home.

Frequently Asked Questions

Do I owe capital gains tax the moment I inherit property?

No. Inheriting property is not a taxable event. You owe capital gains tax only when you sell the property and it has increased in value since the date of death. If you inherit it and sell it for the same price, you owe nothing.

What if I inherited property years ago and never got an appraisal?

If you are about to sell, get an appraisal now and date it as close as possible to the date of death. The appraiser can use historical data and comparable sales from that time to estimate the value. It is not ideal, but it is better than guessing. Keep documentation of how you arrived at the value.

Does the step-up explore if I inherited property before 2010?

Yes. The step-up has been in place for decades and applies to all inherited property regardless of when you inherited it. The only exception was a brief period in 2010 when the step-up was temporarily suspended, but it was reinstated in 2011.

Can I step up the basis of inherited property my spouse and I owned together?

If you and your spouse owned property as joint tenants with rights of survivorship, only half the property receives a step-up when one spouse dies. The other half retains the original basis. Consult a tax professional about your specific ownership structure, as it varies by state and asset type.

What if the property decreased in value between the date of death and when I sold it?

You can report a capital loss. If you inherited property worth $300,000 and sold it for $280,000, you have a $20,000 loss. You can use this loss to offset other capital gains or up to $3,000 of ordinary income in the current year, with any excess carried forward to future years.