Inheriting a house: stepped-up basis and selling
Basis generally resets to the value at the date of death, so a house sold soon after often produces little or no gain, and the sale counts as long-term.
Quick answers
- Do I pay capital gains tax on a house I inherited?
- Only on the gain above its value at the date of death, because that value generally becomes your basis. A sale soon after inheriting often produces very little gain.
- Does it matter how long the person owned the house?
- Not for your basis, and not for the holding period. Property acquired from someone who has died is treated as held for more than a year, whatever the actual dates were.
- Do I need an appraisal?
- You need something that documents the value at the date of death. That number is what your eventual gain is measured against, and reconstructing it years later is difficult.
When you inherit a house, its cost for tax purposes is generally its value on the date of death, not what the person who died paid for it. That reset is why selling soon after inheriting usually produces little or no taxable gain.
Basis is the property's cost in the eyes of the tax system, and the gain on a sale is whatever the price exceeds it by. Inheritance is one of the few situations where basis is not what anybody actually paid. The number you carry forward is a valuation, so a relative who tells you that a house bought decades ago for a small sum will cost you a fortune to sell is working from the wrong figure.
The reset, stated exactly
The general rule is that the basis of property inherited from someone who has died is the fair market value of that property at the date of death. Three alternatives sit beside the general rule, and each is narrow enough that you will know if you are in it. The first is the value on the alternate valuation date, where the personal representative of the estate elects alternate valuation. The second is a special-use valuation, available for real property used in farming or in a closely held business where that method was chosen for estate tax purposes. The third applies to land carrying a qualified conservation easement, where the decedent's adjusted basis carries over to the extent of the excluded value. Most readers of this article are in the first case: a house, a date of death, and a value as of that date.
A Texas wrinkle: community property
Texas is a community property state, and that changes the answer for a surviving spouse in a way that most national articles skip. Property a married couple holds as community property is normally treated as belonging half to each of them. On the first death, though, the whole asset is generally revalued for basis purposes at its date-of-death worth — the survivor's half included, not merely the half that passed through the estate. In plain terms, a widow in Houston can get the reset on her own share as well as on her husband's, which is not how it works in most states. One condition rides along: half or more of the value of that community interest has to count in the deceased spouse's gross estate, and that is so regardless of whether any estate return is actually filed.
The sale is always long-term
Whoever ends up selling the house — an heir, or the estate itself — is treated as having owned it for longer than a year. The real dates do not enter into it, however briefly the person who died held the property and however quickly it moved on afterwards. That saves you two worries at once. There is no holding period to count from the date of death, and no possibility of the short-term rate applying to a house sold three months after a funeral.
Why the home-sale exclusion is not the answer
People reach for the exclusion on the sale of a main home, and it is usually the wrong tool here. That exclusion depends on having owned the home and lived in it, and an heir who never lived in the house does not meet those conditions. In most cases it does not matter, because the reset has already removed the gain the exclusion would have covered. If you did move in, selling your home sets out how the exclusion works.
Get the value documented now
The reset only helps if you can show the number years later, and this is the one thing a reader in this position can still get wrong. An appraisal as of the date of death, or another written valuation, is what supports the figure when the house eventually sells. There is one situation where the number arrives on paper without you chasing it. Where a federal estate tax return has to be filed for the estate, the executor sends each beneficiary a Schedule A of Form 8971 setting out the estate tax value of what they received, and some beneficiaries then have no choice but to adopt that value as their starting basis. Most estates never file that return, so for most families the appraisal or valuation obtained now is the whole record.
Selling, renting, or keeping it
A sale goes on Form 8949 and Schedule D, with the stepped-up figure — not anything the previous owner paid — as the number the price is measured against. If you rent it out instead, the basis you depreciate starts from the same reset value, and a first rental property and Schedule E takes it from there. If several heirs own the house together, each owns a share and each reports their own share of the eventual sale. An estate with a mortgage still on the house, several heirs who disagree, or property in another state is worth an hour with a preparer rather than an afternoon of reading.