How the stepped-up basis rule affects your taxes when you sell an inherited home — and why it's one of the most important tax benefits for heirs.
When you inherit real estate, the IRS does something valuable: it adjusts the property's cost basis to its fair market value on the date of the previous owner's death. This is called a "stepped-up basis." It can dramatically reduce — or eliminate — the capital gains tax you owe when you sell.
Example: How Stepped-Up Basis Works
Your parents bought their home for $80,000 in 1985. When they pass, the home is worth $250,000. Your basis becomes $250,000 — not $80,000. If you sell for $250,000, your capital gain is $0. If you sell for $260,000, your gain is only $10,000. Without the step-up, you'd owe tax on $180,000 in gains.
Most inherited homes sell for an amount close to their date-of-death value — which means most heirs owe little or no capital gains tax. This makes selling immediately after inheriting very tax-efficient. If you hold the property and it appreciates, the gain above the stepped-up basis becomes taxable. Selling quickly after probate often maximizes tax advantages.
Disclaimer: This is general information, not tax advice. Consult a CPA or tax professional about your specific situation.
A formal appraisal is strongly recommended for real estate. It provides a documented fair market value that stands up to IRS scrutiny. The appraisal should be dated as close to the date of death as possible. Some estates use a broker price opinion (BPO) for smaller or less valuable properties. Your CPA can advise on what's appropriate.
If the property sells for less than the stepped-up basis (date-of-death value), you may have a capital loss. However, personal-use property losses are generally not deductible. If the property was converted to investment use, different rules apply. Consult a tax professional if this applies to you.
Yes — the step-up applies to any inherited property, including investment and rental properties. However, depreciation recapture rules still apply to rental property. The depreciation taken by the previous owner is not stepped up. This is a complex area — definitely consult a CPA if inheriting rental real estate.
Tax laws can change, and the stepped-up basis has been discussed in various tax reform proposals. As of now, the step-up remains in effect. If you're inheriting property now, you benefit from the current rules. For estate planning going forward, stay in touch with your advisor about potential changes.
Get a fair cash offer. The stepped-up basis often means little to no capital gains tax on inherited property.
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