Important: This article is general educational information, not tax or legal advice. Basis rules have exceptions. Consult a licensed CPA or attorney before selling inherited property.
Quick answer: When you inherit property, its tax basis generally «steps up» to its fair market value on the date the owner died. If you sell soon after, you owe capital gains tax only on growth after that date, not on the decades of appreciation before it.
What Is Tax Basis?
Basis is the starting point used to calculate gain or loss when you sell an asset. If you sell for more than your basis, the difference is a taxable gain. Normally, basis is what the owner paid. For inherited property, federal law resets it to a new value (26 U.S.C. §1014).
How the Step-Up Works
For most inherited assets, the new basis is the fair market value at the date of death. An executor can sometimes elect an alternate valuation date six months later when it lowers the estate tax. Taxstra gives a clear example: stock bought for $100,000 and inherited when worth $2 million can be sold for $2 million with no capital gain (Taxstra).
Example: Inheritance vs. Gift
| Inherited at death | Gifted during life | |
|---|---|---|
| Original purchase price | $300,000 | $300,000 |
| Value when transferred | $1,500,000 | $1,500,000 |
| Recipient’s basis | $1,500,000 (stepped up) | $300,000 (carryover) |
| Sale price | $1,500,000 | $1,500,000 |
| Taxable gain | $0 | $1,200,000 |
This is an illustration with round numbers. The gift route carries over the giver’s basis, which is why gifting highly appreciated assets can create a larger tax bill for the recipient (Taxstra). See Gift Tax vs. Inheritance.
Assets That Usually Get a Step-Up
- Houses and other real estate
- Stocks, bonds, and mutual funds in taxable accounts
- Businesses and partnership interests
- In some states, both halves of community property when one spouse dies (confirm with a tax professional)
Assets That Usually Do Not
- Traditional IRAs and 401(k)s. These are taxed as income when withdrawn. See Do You Pay Taxes on an Inheritance?
- Assets in some irrevocable trusts that are not included in the owner’s taxable estate (Taxstra).
- Property gifted to the person who died shortly before death and then returned to the giver. Special rules apply, so see IRS Publication 551.
Step-Up in Basis and the Estate Tax Exemption
With a $15 million exemption in 2026, most families will not owe federal estate tax. For them, the step-up can be worth more than estate-tax planning, so gifting appreciated assets before death may cost heirs more in capital gains tax. This is a general principle only. Estates that exceed the exemption or live in states with an estate tax may reach a different conclusion. See Federal Estate Tax Exemption 2026.
How to Document the New Basis
- Get a date-of-death value for each asset: a written appraisal for real estate or a business, statement values for brokerage accounts.
- Keep records with the estate file and your tax records.
- If a federal estate tax return (Form 706) is filed, the values reported there generally need to match the basis you use.
- When you sell, report the sale using the stepped-up basis.
Frequently Asked Questions
Do I pay capital gains on an inherited house?
Only on gain above the stepped-up value at the date of death. If you sell soon after for about the same value, the gain may be small or zero.
Is the holding period long-term?
Inherited property is generally treated as long-term, but confirm with IRS guidance such as Tax Topic 409.
Does the step-up apply to a traditional IRA?
No. Withdrawals from inherited traditional retirement accounts are generally taxed as ordinary income.
Sources
- 26 U.S.C. §1014: Basis of property acquired from a decedent
- IRS Tax Topic 409: Capital gains and losses
- IRS: Instructions for Form 706
- Additional reference consulted (not linked): Taxstra, Estate Tax Exemption 2026.
How We Prepared This Article
We start with primary sources, such as the IRS and the Internal Revenue Code, and then compare with reputable secondary publications. Rules are reviewed at least twice a year and whenever the law changes. This website is an educational publisher, not a law firm or CPA firm.
When to Get Professional Help
Talk to a CPA or tax attorney before selling inherited property, especially if it is a business, a home with a large gain, or property in a community property state.
Keep Reading
- Do You Pay Taxes on an Inheritance?
- Gift Tax vs. Inheritance: 2026 Annual Exclusion Rules
- What Is Probate? How It Works Step by Step
- Revocable vs. Irrevocable Trust
Last reviewed: October 4, 2026
Next review due: April 4, 2027
Disclaimer: This content is for general information only and is not tax or legal advice. Consult a licensed CPA or attorney about your situation.