How does the capital gains tax on inherited property work?

In most cases, you don't owe capital gains tax when you inherit property. Instead, you only owe if and when you sell the property, and only on the appreciated amount. This is largely due to the step-up in basis rule under IRS Section 1014. Inherited property generally receives long-term capital gains treatment, regardless of how soon you sell.

After a loved one dies, navigating funeral procedures and settling their estate can feel overwhelming. If you’ve inherited property as part of their estate planning, you may be wondering whether you'll owe taxes on that property, whether any estate tax obligations could apply and what happens if you decide to sell it in the future.

While inheriting property itself doesn't typically create a capital gains tax liability, special tax rules can affect how gains are calculated if you eventually decide to sell. Understanding those rules—ideally with the help of a trusted financial advisor—can help you make more informed decisions about whether to keep, rent out or sell inherited property.

Inheriting property is not considered a taxable event for federal capital gains tax purposes. You generally do not owe capital gains tax simply because ownership transfers to you through probate or estate administration.

Instead, capital gains tax may apply later if you decide to sell the inherited property. When you sell, only appreciation that occurred after the date of death is generally taxable. That favorable treatment comes from the step-up in basis rule below.

The “step-up in basis” (a cost basis reset of the property’s tax starting point) is one of the most valuable tax benefits tied to inherited real estate . Under IRS Section 1014, your inherited property generally receives a new tax basis equal to its fair market value at the date of death.

Let’s say your parent originally purchased a home for $80,000. At the time they passed away, the property was worth $450,000. If you decide to sell the home immediately at that value, your taxable gain is $0. Even though the property's value increased by $370,000 during your parent’s ownership, that appreciation is effectively wiped out by the step-up in basis rule. Your taxable gain is $0 because your stepped-up basis is now $450,000.

On the other hand, let’s say you sell the property two years later for $475,000. In that case, your taxable capital gain would be $25,000, the difference between your stepped-up basis and the final sale price.

To establish your fair market value at the date of death, you should obtain a professional appraisal. In some cases, the estate may elect an alternate valuation date instead. Keep the appraisal, estate documents and sale records for at least seven years in case the IRS requests documentation later.

Calculating your capital gains on inherited property goes like this:

1. Determine the fair market value of the property on the date of death, which is your stepped-up basis.
2. Subtract your basis from the final sale price. The difference is your taxable gain.
3. If the sale price is below your basis, you have a capital loss, which may offset other capital gains.
4. Report the gain on Form 8949 and Schedule D when filing your federal tax return.

Your actual tax rate depends on your total taxable income and filing status for the year of the sale.

Because inherited property is generally treated as a long-term capital asset, any taxable gain is typically taxed at the long-term capital gains rates shown below.

In addition to the rates above, high earners with a modified adjusted gross income above $200,000 (single) or $250,000 (married filing jointly) also may owe the 3.8% net investment income tax (NIIT).

These rates apply only to long-term gain, and inherited property automatically qualifies for long-term treatment regardless of how long you hold it before selling.

Last reviewed: May 2026. Federal tax brackets and thresholds are subject to annual IRS adjustment.

Your inherited property automatically receives long-term capital gains treatment regardless of how soon you sell the property. That means there is no required 12-month holding period. Even if you sell the real estate immediately after inheriting it, the IRS still applies long-term capital gains rates rather than short-term ordinary income tax rates.

This rule can create substantial tax savings because short-term capital gains rates can reach as high as 37%.

If you move into the inherited property as your primary residence, you may qualify for the Section 121 exclusion. This rule can shelter up to $250,000 of capital gain from taxes ($500,000 for married couples filing jointly) if you live in the home for at least two of the five years before the sale. That exclusion applies on top of the stepped-up basis benefit, which can significantly reduce or even eliminate taxable gain.

If you choose to make your inherited property a rental, you can deduct depreciation over time while you’re a landlord. However, depreciation recapture may increase taxes if your rental property is eventually sold. In some cases, lengthier rentals qualify for a 1031 exchange (also known as a like-kind exchange), so you can defer taxes by reinvesting into another qualifying property.

Because rental property rules can be complex, especially when depreciation, passive income or multiple heirs are involved, you should consult a CPA or tax advisor before selling.

Estate tax vs. inheritance tax: Who pays & in which states?

Learn how estate and inheritance taxes differ, who’s responsible for each and which states impose them so you can be tax-efficient with the wealth you plan to pass on.


Learn more about tax payments

It's important to understand the difference between inheritance tax and estate tax. Inheritance tax is paid by the person who receives assets from an estate, while estate tax is paid by the estate before assets are distributed to heirs.

Most inherited assets are not subject to inheritance tax. However, some assets, including inherited IRAs and annuities, may still be subject to ordinary income taxes when distributions are taken. By contrast, life insurance death benefits paid directly to named beneficiaries are generally exempt from federal income tax, though exceptions may apply.

As of 2026, only a handful of states impose an inheritance tax:

• Kentucky
• Maryland
• Nebraska
• New Jersey
• Pennsylvania

Iowa previously imposed an inheritance tax, but it was fully repealed for deaths occurring on or after January 1, 2025. In many cases, surviving spouses are exempt from inheritance tax, though exemptions for other family members vary by state.

Federal estate tax: At the federal level, estate tax generally applies only to very large estates. For 2026, the federal estate tax exemption exceeds $15 million, meaning most estates will not owe federal estate tax.

State estate tax: Some states also impose their own estate taxes with lower exemption thresholds than the federal government. For example, Massachusetts applies estate tax to estates valued at more than $2 million for decedents dying on or after Jan. 1, 2023. Check out the full list.

Community property states: In Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin, a surviving spouse may receive a stepped-up basis on the entire jointly owned property instead of just the deceased spouse’s half.

When you sell inherited property, you should report the transaction on Form 8949. This form includes:

• Date inherited
• Date sold
• Stepped-up basis
• Sale price
• Capital gain or loss

The totals then carry over to Schedule D of your Form 1040.

In some cases, the estate may also file Form 8971 to notify heirs of the property’s reported basis value. If you receive those documents, use that amount as your starting basis unless adjustments apply.

For inherited rental or income-producing property, Form 4797 also may apply for certain asset types and depreciation recapture calculations.

Keep copies of:

• Appraisals
• Death certificate
• Estate closing documents
• Improvement receipts
• Probate and estate administration records
• Sale documents

Accurate documentation can help support your basis if the IRS has follow-up inquiries later. If you need assistance while preparing your inherited property taxes, a financial advisor can help simplify the process.

• Sell promptly at the stepped-up basis: If the property has not appreciated since the date of death, an immediate sale may produce little or no taxable gain.
• Move in and use the Section 121 exclusion: Living in the inherited home for at least two of the next five years may allow you to exclude up to $250,000 of capital gains on inherited real estate ($500,000 if married filing jointly).
• Time the sale for a lower-income year: Selling during a year with lower taxable income could help you qualify for the 0% or 15% long-term capital gains rate.
• Offset gains with capital losses: Investment losses from other assets can help reduce taxable gains from inherited real estate sales.
• Use a 1031 exchange for rental property: If the inherited property is held for investment purposes, reinvesting proceeds into another qualifying investment property may defer taxes.
• Donate the property to charity: Donating appreciated inherited property to your preferred qualified charitable organization may eliminate capital gains tax and potentially create a charitable deduction.

Every inheritance situation is different, and the tax implications can become more complex when multiple heirs, rental income, trusts or large estates are involved. Before deciding to keep, rent out or sell inherited property, consider speaking with a CPA or tax professional and a Thrivent financial advisor, who can help you navigate both the tax implications and the broader decisions to plan what comes next.