Inheriting a property can be a blessing or a burden. It may be expensive to maintain or difficult to manage from a distance. If you decide to list the home on the market, you may be wondering if you’ll pay tax on selling an inherited property.
In this guide, we’ll explain the tax considerations for selling inherited property and tell you what to expect and when. From potential capital gains to estate and inheritance taxes, knowing what’s required can save you from surprises when it’s time to file.
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Editor’s note: This post is for educational purposes. If you need assistance figuring out the tax on selling your inherited property, HomeLight encourages you to consult a professional advisor.
Will you pay tax on selling inherited property?
Selling an inherited property can come with tax responsibilities, depending on factors like property value, timing, and location. Here’s an overview of each possible tax:
Inheritance taxes
Inheritance taxes apply in a limited number of U.S. states and are based on the value received by each beneficiary. Notably, this tax is the heir’s responsibility, not the estate’s.
“Only six states impose inheritance taxes: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania,” explains Nicole Green, a senior tax consultant with Robert Hall & Associates. “Basically, the state says they will tax anything over a set amount, which might be 500K. So if you get a house for 900K, you will pay the state maybe 2% of the 400K difference (or about $8,000).”
Rates and exemptions vary, so if the property is located in one of the six states, you may need to consider this tax, though close relatives often receive full or partial exemptions.
There is no federal inheritance tax.
Estate taxes
Estate taxes differ from inheritance taxes in that they’re levied on the estate’s total value before distribution to heirs. The federal estate tax exemption is substantial — over $13 million as of 2024 — so most estates aren’t affected. However, 12 states and the District of Columbia impose estate taxes, often with lower exemption thresholds. If the estate exceeds the state-level thresholds, a portion of its value may be taxed before beneficiaries receive their inheritance.
Both inheritance and estate taxes are sometimes called “death taxes.”
Gift tax
While not an immediate tax for a seller, if you inherit a property and decide to transfer it to someone else as a gift, the gift tax could apply. This tax affects transfers of significant value made during your lifetime, but there are annual and lifetime exclusions.
For example, you can give up to $18,000 (tax year 2024) per recipient per year without incurring a gift tax, and the lifetime exemption is currently set at $13.61 million. This is typically not a concern if you’re selling the property outright, but it’s helpful to know if you’re considering gifting it instead.
Capital gains taxes
Capital gains tax is one of the primary tax considerations for inherited property, especially if the property’s value has increased over time. When you sell an inherited property, capital gains taxes are calculated based on the difference between the sale price and the property’s “stepped-up” value, which is its fair market value at the date of inheritance.
In the next sections, we’ll explore how this stepped-up basis affects your tax obligations, whether you sell right away or hold onto the property for a while.
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).
Get a free home value estimate: Curious about what your inherited property might be worth? HomeLight’s Home Value Estimator uses market trends, transaction data, and public records to give you a ballpark estimate. Answer a few questions about the home to get started today.
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:
- Proof you inherited the property: Documents like the will or probate records confirm your legal right to sell the property.
- Current property ownership documents: Include deed, title, and any prior transfer records to establish ownership.
- Proof of executor authorization: Power of attorney or other legal documents that grant authority to manage and sell the property.
- Existing home loan documents: Loan statements or payoff documentation, which clarify any remaining debts tied to the property.
- Property value documents: An appraisal or comparative market analysis (CMA) to establish the property’s market value.
- Tax documents related to the property: Property tax records and estate tax returns that show past taxes paid or due.
- Home repair, improvement, and inspection records: Receipts and reports detailing the property’s condition and any major repairs.
- Homeowners or community association documents: HOA or condo documents showing rules, payments, and property compliance.
- 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.
If you are interested in a no-obligation cash offer for your inherited home, HomeLight’s Simple Sale platform can connect you to the largest network of trusted cash buyers in the country. Answer a few questions about the property and your selling timeline, and you’ll receive an offer within 24 hours. If you accept the offer, you can close in as little as 10 days.
FAQs on selling inherited property
No, the sale of an inherited home typically does not count as regular income in the traditional sense. However, any gain you realize from the sale — meaning the difference between the sale price and the stepped-up basis noted above — is considered a capital gain, which may be taxable. This is distinct from income tax and applies only to the profit from the sale, not the entire sale amount.
According to the IRS, if you receive an income-reporting document with the inheritance, such as Form 1099-S (Proceeds From Real Estate Transactions), you must report the sale of the home even if the gain from the sale is excludable. You must also report the sale of the home if you can’t exclude all of your capital gain from income.
If you are required to report the sale, use Form 1040 Schedule D (Capital Gains and Losses) and Form 8949 (Sales and Other Dispositions of Capital Assets). You can learn more about the rules on reporting your sale on your income tax return by reading IRS Publication 523.
To put this all simply, inheriting a property does not require IRS reporting, but selling it at a price that puts your proceeds beyond tax exclusion limits does. The stepped-up basis will help determine your taxable gain (if any).
If the inherited property has a mortgage, the debt typically transfers with the property. You may need to continue making payments or settle the loan through refinancing, selling, or paying it off with other resources. Some lenders may require refinancing or payoff upon inheritance, depending on the mortgage terms, so it’s essential to check with the lender to understand your obligations.
Using a real estate agent can simplify the process, especially if you’re unfamiliar with property sales or navigating inheritance procedures. An agent can help price the home accurately, handle the marketing, and negotiate with buyers. Additionally, they can guide you through the necessary paperwork and manage potential challenges, making the sale process smoother and more efficient.
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.
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