Capital Gains Tax When Selling Inherited Property

Selling inherited property — whether a home, stocks, or other assets — creates potential capital gains tax. But thanks to the stepped-up basis and favorable long-term rates, heirs often pay far less tax than they expect. Here's how capital gains tax works for inherited property.

The Stepped-Up Basis: Your Starting Point

When you inherit property, your cost basis for tax purposes is generally the fair market value at the date of the deceased's death — not what they originally paid for it. This is the "stepped-up basis." It's the most important concept to understand before making any decisions about selling inherited property.

If the deceased paid $100,000 for a home that's worth $500,000 at their death, your basis is $500,000. If you sell the home for $500,000 shortly after inheriting it, your capital gain is $0 — and you owe no capital gains tax.

For a full explanation of how the step-up works, see our article on the stepped-up cost basis for inherited property.

Long-Term Capital Gains Rates (Always Apply to Inherited Property)

Here's another key benefit: inherited property is automatically treated as "long-term" for capital gains purposes, regardless of how long you actually held it. Even if you sell the day after inheriting, you pay long-term capital gains rates — not the higher short-term rates that would apply to assets held less than one year.

Long-term capital gains rates for 2024:

• 0% — for taxable income up to $47,025 (single) / $94,050 (married filing jointly)
• 15% — for most middle-income taxpayers
• 20% — for high-income taxpayers

Additionally, high-income taxpayers may owe an additional 3.8% Net Investment Income Tax (NIIT) on capital gains.

Selling Inherited Real Estate

Primary residence exclusion

If you inherit a home and live in it as your primary residence for at least 2 of the 5 years before selling, you can exclude up to $250,000 of gain ($500,000 if married). This exclusion is in addition to the step-up benefit. If the home has appreciated after you inherited it, and you've lived there long enough, this exclusion can eliminate remaining gains.

If you sell shortly after inheriting

If you sell an inherited home shortly after the death, the gain (if any) is typically small — the difference between the stepped-up value and the sale price. Selling costs (real estate agent commission, closing costs) reduce the gain further. In many cases, selling an inherited home within 6 months of death results in no capital gains tax or a very small one.

The date of death appraisal

To establish your stepped-up basis, you need a professional appraisal of the property's fair market value as of the date of death. Get this done promptly — it's much easier to substantiate value shortly after death than years later.

Selling Inherited Stocks and Securities

For inherited publicly traded securities, the stepped-up basis is the average of the stock's high and low price on the date of death (or the average of an alternate valuation date if the estate elected one). Your brokerage should have the date-of-death value on file when you transfer the account.

When you sell the securities, your gain is:

Sale price - Stepped-up basis - Selling costs = Taxable gain

If you sell for less than the stepped-up value, you have a capital loss, which can offset other capital gains.

Alternate Valuation Date

For large taxable estates, the executor can elect to value all estate assets at an alternate valuation date — 6 months after the date of death — rather than the date of death. This may be beneficial if estate values have declined since the date of death, reducing estate taxes. The trade-off is that the lower alternate date value also becomes the basis for inherited assets (potentially resulting in higher capital gains taxes later). This election affects all estate assets and requires careful analysis.

State Capital Gains Tax

Many states tax capital gains as ordinary income (not at the lower federal capital gains rates). The state capital gains tax on an inherited property sale is in addition to federal capital gains tax. Check your state's treatment of capital gains.

Planning Considerations

Given the stepped-up basis benefit:

• There is generally no capital gains tax benefit to selling appreciated assets quickly before death — the step-up eliminates those gains at death
• Heirs who inherit highly appreciated assets should consider their basis before selling
• If the estate includes assets that have declined in value, selling before death captures the loss for income tax purposes; after death, the step-down (lower basis) eliminates the loss deduction

For the complete taxes after death guide, see our taxes after a death guide. For the basis rules for inherited property, see our article on the stepped-up cost basis for inherited property.