Do You Pay Capital Gains Tax on an Inherited House?

When you inherit a home and decide to sell it, you may face capital gains tax. This is a tax on the profit from selling an asset, like a house. The rules for inherited property are distinct from a typical home sale and can change the amount of tax owed.

Determining the Cost Basis of an Inherited Home

A property’s cost basis is its value for tax purposes, which is the starting point for calculating capital gains. For inherited property, the cost basis is determined by the “stepped-up basis” rule. This rule resets the property’s basis to its Fair Market Value (FMV) on the date of the original owner’s death, meaning any appreciation during the decedent’s lifetime is not taxed.

To establish the FMV at the date of death, the most reliable method is to hire a licensed real estate appraiser who can provide a detailed report. Another method involves using the county’s property tax assessment records from the year of death, though this may be less precise than a professional appraisal. The executor of the estate is responsible for determining this value and should be the primary contact for this information.

For estates subject to federal estate tax, the executor may use an “alternate valuation date,” which is six months after the date of death. This option is only available if it decreases both the estate’s total value and the estate tax owed. This choice can be beneficial if property values decline shortly after the owner’s death.

The benefit of the stepped-up basis is substantial. For instance, if a parent bought a home for $50,000 and it was worth $450,000 on the day they died, the heir’s cost basis becomes $450,000. If the heir sells the house for $470,000, the taxable gain is only $20,000, erasing the tax liability on the $420,000 of appreciation that occurred during the parent’s life.

Calculating the Capital Gain or Loss

Once the stepped-up basis is established, the capital gain or loss is calculated. The formula is the home’s selling price, minus selling expenses, minus the stepped-up basis. The result is your capital gain or a capital loss.

Selling expenses are the costs associated with the sale that reduce your total gain. These deductible costs include real estate agent commissions, title insurance, legal fees, advertising costs, and other closing costs paid by the seller. For example, if you sell an inherited home for $500,000 with a stepped-up basis of $450,000 and paid $30,000 in closing costs, your taxable gain would be $20,000.

Any gain from selling an inherited property is automatically classified as a long-term capital gain. This applies regardless of how long you owned the property. This treatment is advantageous because long-term capital gains are taxed at lower rates than ordinary income.

The tax rates for long-term capital gains are 0%, 15%, or 20%, depending on your taxable income and filing status. For 2025, the 0% rate applies to single filers with a taxable income up to $48,350. The 15% rate applies to incomes between $48,351 and $533,400, and the 20% rate applies to incomes above that.

The Home Sale Exclusion for Inherited Property

The main home sale exclusion allows a taxpayer to exclude up to $250,000 of gain ($500,000 for married couples filing jointly) from the sale of a primary residence. To qualify, a seller must meet both an ownership test and a use test. This requires having owned and lived in the home as a primary residence for at least two of the five years before the sale.

For an inherited home, you can add the deceased person’s ownership time to your own to satisfy the two-year ownership test. However, you must personally meet the two-year use test. This means you must move into the house and make it your primary residence for at least two years.

If an inheritor moves into the inherited house and lives there for at least two years before selling, they can qualify for the exclusion.

For example, you inherit a home with a stepped-up basis of $400,000 and make it your primary residence for two years. After two years, you sell the house for $675,000, realizing a gain of $275,000. Because you met the ownership and use tests, you can use the $250,000 exclusion, which reduces your taxable gain to just $25,000.

Reporting the Sale to the IRS

After the sale, you must report the transaction to the IRS on your federal income tax return using Form 8949, Sales and Other Dispositions of Capital Assets. On this form, you will detail the property sold, the date you acquired it (for which you can write “inherited”), the date it was sold, the sales price, and your cost basis.

The totals from Form 8949 are then transferred to Schedule D, Capital Gains and Losses, which is filed with your Form 1040. Schedule D summarizes your gains and losses to arrive at a net figure that is included in your overall taxable income for the year.

After closing, you will receive Form 1099-S, Proceeds From Real Estate Transactions, from the closing agent. This form reports the gross proceeds from the sale and is also sent to the IRS. The amount on Form 1099-S must match the sales price you report on Form 8949, so it is important to use this document when preparing your tax return.