Will You Pay Tax on Selling an Inherited Property?

Capital gains are taxed on a stepped-up basis

When you inherit a property, the capital gains tax you might face upon selling it is based on a “stepped-up” basis. This stepped-up basis refers to an adjustment in the property’s cost basis — the starting value used to calculate any gain or loss when you sell. Instead of the original purchase price, the basis is “stepped up” to the property’s fair market value on the date of inheritance.

“People forget or don’t know about this step up in basis,” Green says. “When you inherit any property (stock, a house, etc.), your basis is the value of said item on the date of death.”

Green provides this example: “If I inherit a property from my long-lost aunt and eventually sell it for 900K, I would take the value of the property when she passed away, which was maybe 800K, and subtract that from the sale price. I would not use her basis, which would be what she paid for it way back when — say, 500K. As a result, I would pay capital gains tax on the 100K difference.”

This adjustment can significantly reduce your taxable gain, as it accounts for the property’s value increase over the years.

Here is the formula for calculating the taxable gain on an inherited property:

Taxable gain = Sale price – Stepped-up basis

Taxable gain examples: Selling an inherited property

Let’s take a closer look at how this works, with examples for selling immediately and holding onto the property.

If you sell the home immediately

If you sell the inherited home shortly after inheriting it, the stepped-up basis usually minimizes your taxable gain. Since the property’s fair market value is recent, you’re likely to sell at a price close to the stepped-up basis, leading to little or no taxable gain.

Example: Let’s say you inherited a property valued at $300,000 (the stepped-up basis) and sold it right away for $310,000. Here, your taxable gain is only $10,000 ($310,000 sale price – $300,000 stepped-up basis).

If you wait and sell the home later

Holding onto an inherited property for a few years before selling can lead to a higher taxable gain if the property’s value increases. Any appreciation above the stepped-up basis is subject to capital gains tax when you eventually sell.

Example: Suppose you inherited a home valued at $300,000 (stepped-up basis) and kept it for five years, during which its value grew to $350,000. If you then sell for $350,000, your taxable gain would be $50,000 ($350,000 sale price – $300,000 stepped-up basis).

Documents you need to sell an inherited house

Here’s a quick look at nine document categories you may need to sell your inherited home:

1. Proof you inherited the property: Documents like the will or probate records confirm your legal right to sell the property.
2. Current property ownership documents: Include deed, title, and any prior transfer records to establish ownership.
3. Proof of executor authorization: Power of attorney or other legal documents that grant authority to manage and sell the property.
4. Existing home loan documents: Loan statements or payoff documentation, which clarify any remaining debts tied to the property.
5. Property value documents: An appraisal or comparative market analysis (CMA) to establish the property’s market value.
6. Tax documents related to the property: Property tax records and estate tax returns that show past taxes paid or due.
7. Home repair, improvement, and inspection records: Receipts and reports detailing the property’s condition and any major repairs.
8. Homeowners or community association documents: HOA or condo documents showing rules, payments, and property compliance.
9. Documents after the sale: Final statements and ownership transfer records that finalize the sale process.

To learn about the specific document names and uses, see our post: What Documents Are Required for Selling an Inherited Property?

How to sell an inherited house fast

To sell an inherited home quickly, consider these strategies:

• Price it competitively: An attractive price encourages faster offers.
• Declutter and clean: A well-presented home appeals more to buyers.
• Market strategically: Use online listings and high-quality photos.
• Consider cash buyers: Cash buyers, including investors, can expedite the process since they often skip financing contingencies.
• Work with an experienced agent: A real estate agent with experience in estate sales can streamline the sale and manage buyer interest.

Ready to sell your inherited property?

Selling an inherited property comes with unique considerations, from understanding capital gains tax to handling the required documents. Knowing what to expect can make the process more manageable, especially if you’re navigating tax implications, mortgage questions, and market conditions for the first time.

“Lots of people like to inherit and keep something,” Green says. “This can be a good thing, but a lot of times, it’s great to quickly sell and reinvest in something. You won’t have capital gains, and you won’t have the emotional attachment.”

If you’re ready to take the next step, consider partnering with a professional who can guide you through the process. Whether you’re looking for a quick sale or maximizing value, HomeLight can help you choose the best outcome for your inherited property.

Header Image Source: (Imagenet/DepositPhotos)