What Are the Capital Gains Taxes on an Inherited Property?

If you’ve inherited a house, one of the first questions you’re probably asking is, “Am I going to owe capital gains taxes?”

It’s easily one of the most common questions we get here at Arborview Homebuyers.

Before we dive in, I want to make one thing clear: I’m not a tax professional, and I don’t pretend to be one. Every family’s tax situation is different, so I highly recommend sitting down with a CPA who can look at your specific circumstances and give you advice that’s tailored to you.

With that said, let’s walk through some of the basics so you can better understand how capital gains taxes generally work when it comes to inherited property.

Understanding Capital Gains Taxes on Inherited Property

One of the first things you need to know is whether the property you’re inheriting was:

• A personal residence
• An investment or rental property

Those two situations can be taxed differently, and that’s something your CPA will want to know.

The other important concept you need to understand is something called step-up in basis.

What Is Basis?

Think of your basis as the amount invested in the property.

Here’s a simple example.

Let’s say you buy a rental property today for $100,000. Then you spend another $50,000 renovating it before renting it out.

Your total basis in the property would now be $150,000.

Five years later, you sell the property for $250,000.

On paper, it looks like you have a $100,000 capital gain.

Now, that’s a simplified example. In reality, there could be selling expenses, commissions, transfer taxes, property taxes, and additional capital improvements like replacing a roof that could affect your final gain.

But it gives you a good idea of how basis works.

What Is Step-Up in Basis?

Now let’s talk about the part that applies specifically to inherited property.

When someone inherits real estate, the property’s basis generally steps up to its fair market value on the date of the owner’s death.

That’s why it’s called a step-up in basis.

Here’s an example.

Let’s say your parents bought a rental property 15 years ago for $150,000.

They owned and rented it for years, and their basis remained around that amount.

Then your parents pass away, and you and your siblings inherit the property.

Let’s also say that on the date of their passing, the property was worth $300,000.

Even though they originally paid $150,000, the property’s basis is now generally stepped up to $300,000.

That’s the number your CPA will typically start with when calculating potential capital gains.

How Step-Up in Basis Can Reduce Capital Gains Taxes

Let’s continue with that same example.

If you inherited the property and sold it two weeks later for $300,000, your sale price and your stepped-up basis would be the same.

That means there would generally be no capital gain to report because there isn’t any appreciation beyond the property’s value on the date of death.

Again, this is an oversimplified example, but it’s one of the reasons why so many inherited property owners are relieved when they learn how step-up in basis works.

Your CPA can calculate the actual numbers based on your family’s situation.

Need Help Selling an Inherited Property?

If you’ve recently inherited a house and you’re trying to figure out your next step, we’re here to help.

Whether you’re considering selling the property for cash or exploring the traditional real estate market, our team works with families going through probate every day and can help point you in the right direction. ⬇️⬇️⬇️

Don’t Forget About Estate Tax Exemptions

There’s another topic worth mentioning: estate tax exemptions.

I’m not going to get into all the details because that’s really a conversation to have with your CPA, but estate tax laws exempt estates up to a certain value before federal estate taxes apply.

As of the time this video was recorded, that exemption amount was over $12 million.

For many families, that means they may not owe estate taxes, inheritance taxes, or even capital gains taxes when selling inherited property.

Of course, every situation is different.

For example, things can become more complicated if one spouse passes away while the other survives, or if the property was owned jointly with rights of survivorship.

Those are exactly the kinds of situations where a tax professional can help you understand how the rules apply to your family.

Talk to a CPA Before Making Tax Decisions

Tax questions are easily the number one question we receive.

The reality is that no two probate situations are exactly alike.

That’s why it’s so important to work with a qualified CPA who can review your numbers, explain your options, and help you make the best decision for your situation.

We Can Help You Sell an Inherited Property

If you’ve inherited a property and you’re ready to sell, Probate Resource would love the opportunity to help.

We buy inherited and probate properties for cash and do everything we can to make the process as simple as possible—kind of like pressing the “Easy Button.”

If selling directly isn’t the right fit, we also have a nationwide network of probate and inheritance real estate specialists who can help you list your property on the open market.