Do I Have to Pay Capital Gains on the Sale of an Inherited Home?

If you have inherited a house, you have some decisions to make, starting with whether to sell or keep the house. In some cases, selling may be the only practical option; you may already have a home, or the inherited house may be in a location where you don’t want to live. If you’re lucky, the mortgage on the house is paid off, and you’ll pocket a respectable sum after the sale. 

But what about taxes? You may have heard that you have to pay capital gains tax on the sale of a house that is not your primary residence. That is generally true. Let’s talk about what capital gains tax is, when it is imposed, and why you may not have to pay as much as you think—if anything at all. 

What is Capital Gains Tax?

Capital gains tax is a tax you pay on gains on the sale of a capital asset, such as real estate. Other capital assets include stocks, bonds, art, collectibles, vehicles, precious metals, and business assets. You are not taxed on the gain until it is realized. For example, you may own a stock that has gone up in price, but you don’t pay tax on the appreciation until you sell the stock. 

The difference between the price at which you acquired the stock (your “cost basis”) and the sales price is the amount of your gain. For instance, if you bought a share of stock at $20, that would be your cost basis. If you later sold it for $70, your gain on the sale would be $50 ($70-$20).

Short-term capital gains and long-term capital gains are taxed differently. Short-term gains are those on capital assets that have been held for less than a year, calculated from the day after the asset was acquired until the date of sale. Long-term capital gains are those on assets held for more than a year. The distinction is important because long-term gains are generally taxed at a more favorable rate than short-term gains, which are taxed as ordinary income.

Does that mean that you should hold onto an inherited home for at least a year before selling it to benefit from the more favorable long-term capital gains rate? No. Even if you hold the property for less than a year, profit on the sale of an inherited asset like a house would be considered a long-term capital gain. There’s also more good news for people who are selling a capital asset they have inherited: the step-up in basis. 

What is the Step-Up in Basis?

The step-up in basis is an increase in cost basis for inherited assets. In a nutshell, regardless of what the person from whom you inherited the asset paid for it, your basis in the asset is the fair market value of the asset as of the date of their death.

Let’s say your Aunt Esther bought a house in 1974 for $75,000. She left the house to you in her will, and when she died in 2024, the house was worth $600,000. If you turned around and sold the house immediately, you might expect the gain on the house to be $425,000 ($600,000-$75,000). And it would be—if Aunt Esther had given you the house before her death, rather than leaving it to you in her will. 

Because you inherited the house, you benefit from the step-up in basis. You take the house at a cost basis of $600,000: its fair market value at Aunt Esther’s death. If you sell it a few months later after the value has risen to $605,000, you will pay capital gains tax—but only on the $5,000 difference between your stepped-up basis of $600,000 and the sale price. 

To reiterate: gifts given during the giver’s lifetime do not receive a step-up in basis, even if they are given shortly before the giver’s death. Assets inherited through a will, revocable living trust, or by operation of state law, do receive the step-up in basis. Assets inherited through certain types of irrevocable trusts may also receive the step-up in basis—or may not —depending on the structure of the trust and whether the grantor of the trust retained any power in the trust. 

Get the Guidance of an Experienced Estate Attorney

If you are deciding what to do with a home you have inherited, or are trying to decide how best to leave your home to loved ones while minimizing their tax burden, contact Estate Planning & Elder Law Services to schedule a consultation and explore your options.