Selling Inherited Property: Tax Implications and Best Practices
Selling an inherited property involves unique tax considerations that differ significantly from selling a home you purchased yourself. The step-up in basis rule is your most valuable tool, but there are important nuances to understand.
Step-Up in Basis
When you inherit property, your cost basis "steps up" to the fair market value at the date of the decedent's death. This means if your parent bought a home for $100,000 and it was worth $400,000 when they passed, your basis is $400,000, not $100,000.
Step-Up Benefit
Resets Basis
to fair market value at date of death, potentially eliminating all capital gains
Capital Gains on Inherited Property
If you sell quickly after inheriting, the stepped-up basis means you likely have little or no capital gains. If you hold the property and it appreciates further, you will owe capital gains only on the appreciation since the date of death.
The $250K/$500K Exclusion
The primary residence exclusion generally does not apply to inherited property unless you move into it and use it as your primary residence for at least 2 of the 5 years before selling.
Probate Considerations
In most states, the property must go through probate before it can be sold. Probate timelines vary from 3 months to over a year depending on the state and complexity of the estate.
Selling Strategies
- Sell quickly: Minimal capital gains due to stepped-up basis
- Rent then sell: May allow depreciation but complicates the tax picture
- Move in: After 2 years, you may qualify for the exclusion on future appreciation
- 1031 exchange: If used as investment property, you can defer any gains
The Bottom Line
Inherited property benefits from the stepped-up basis, which can eliminate years of capital gains. Selling soon after inheritance minimizes tax liability, while holding creates potential for additional gains that will be taxable.