Is It Better to Sell a House Before or After Death?

Deciding whether to sell a home before or after an owner’s passing involves navigating financial implications. While emotional aspects are present, the primary drivers for this choice are often rooted in tax considerations. Understanding the various tax rules that apply to property sales, both during a lifetime and after death, can impact the financial outcome for the owner and their beneficiaries.

Tax Considerations When Selling While Living

Selling a home during one’s lifetime generally subjects the transaction to capital gains tax. This tax applies to the profit realized from the sale, calculated as the sale price minus the adjusted basis of the property. For most homeowners, the Section 121 exclusion can reduce or even eliminate this tax liability. This exclusion allows a taxpayer to exclude up to $250,000 of capital gain from the sale of a primary residence. For married couples filing jointly, this exclusion doubles to $500,000.

To qualify for this exclusion, the homeowner must meet both an ownership test and a use test. These tests require the individual to have owned and used the home as their main residence for at least two years out of the five-year period ending on the date of the sale. The two years of use do not have to be consecutive, providing flexibility for homeowners who might have moved for a period and then returned.

Selling expenses, such as real estate agent commissions, legal fees, and title insurance, can reduce the total amount of taxable gain. These costs are typically subtracted from the sale price to arrive at the net sale price, which is then used in the capital gains calculation. Proper record-keeping of all acquisition and selling expenses is important for accurate tax reporting.

In cases where a property was previously used as a rental or for business purposes, depreciation might have been claimed over the years. If so, a portion of the gain from the sale could be subject to “depreciation recapture.” This means that the previously deducted depreciation is taxed upon sale, generally at a maximum rate of 25% for real estate, known as unrecaptured Section 1250 gain. Any gain exceeding the recaptured depreciation amount would then be subject to the standard long-term capital gains rates.

Tax Considerations When Selling After Death

When a property is sold after the original owner’s passing, the tax implications shift significantly, primarily due to the “stepped-up basis” rule. Under this rule, the inherited property’s cost basis is adjusted to its fair market value on the date of the decedent’s death. This adjustment can significantly reduce or even eliminate capital gains tax for the heirs if they sell the property shortly after inheriting it. For instance, if a home purchased for $100,000 is valued at $500,000 at the owner’s death, the heirs’ basis becomes $500,000. If they sell it for $510,000, they would only be taxed on the $10,000 gain.

Determining the fair market value (FMV) for estate purposes typically involves a professional appraisal of the property as of the date of death. This appraisal provides an official valuation that is used for tax calculations and estate administration. In some instances, an alternative valuation date, six months after the date of death, can be elected if it results in a lower overall estate value.

The federal estate tax is another consideration. For 2025, the federal estate tax exemption limit is $13.99 million per individual. For married couples, this exemption effectively doubles.

The process of selling an inherited property involves probate, which is the legal process of administering a deceased person’s estate. This court-supervised procedure ensures that assets are properly distributed and debts are settled. The executor or personal representative of the estate must obtain court approval to sell real estate within the probate process, ensuring the sale is in the best interest of the estate and its beneficiaries.

Determining Property Basis for Tax Purposes

Understanding property basis is fundamental to calculating capital gains or losses when a home is sold. For a property acquired through purchase, the “cost basis” is generally the original purchase price. This initial cost is then increased by certain allowable closing costs, such as legal fees, title insurance, and recording fees incurred during the acquisition.

The basis can be further adjusted over the period of ownership. Capital improvements, which are enhancements that add value to the property, prolong its useful life, or adapt it to new uses, are added to the cost basis. Examples include major renovations, room additions, or significant system upgrades. Conversely, if the property was used for rental or business purposes, depreciation deductions claimed over time will reduce the basis. This adjusted basis is the figure subtracted from the sale price to determine the taxable gain or loss.

In contrast to a purchased property, the basis for inherited property is its fair market value on the date of the decedent’s death. This “stepped-up basis” minimizes potential capital gains tax for heirs if the property has appreciated substantially over the original owner’s lifetime. This inherited basis differs from the “gifted basis,” where a recipient of a gifted property generally takes the donor’s original adjusted basis. This means if a property was gifted, the recipient could face a much larger capital gains tax upon sale compared to inheriting the same property, as the gain would be calculated from the donor’s original, lower basis.