Capital Gains Tax on Inherited Property: The Plain-English Guide

How is capital gains tax calculated on inherited property?

Gain = sale price (minus selling costs) − stepped-up basis. The stepped-up basis is the property's fair market value (FMV) on the date the original owner died, not what they paid for it decades ago.

Example: Mom bought the house in 1982 for $48,000. She died in March 2025 when comparable sales put the FMV at $410,000. You sell in November 2025 for $415,000 with $25,000 in selling costs. Your taxable long-term gain is $415,000 − $25,000 − $410,000 = negative $20,000 — a deductible loss, not a gain.

Is the gain long-term or short-term?

Always long-term. IRS Publication 559 confirms that property inherited from a decedent is automatically treated as held more than one year, regardless of how long you actually owned it. Long-term rates (0%, 15%, or 20% in 2025) are far better than ordinary-income short-term rates.

When does a capital gains bill actually appear?

Three common scenarios: (1) FMV at death was understated and the house sells for substantially more later; (2) you hold the property for years and it continues to appreciate after death; (3) you can't document a date-of-death valuation, forcing you to use a conservative estimate. We always recommend ordering a retrospective appraisal early in probate — it costs $400–$700 and locks in your basis number with a paper trail.

What if the property was held in a trust?

Revocable living trusts (the most common) still get a full step-up at death. Irrevocable trusts sometimes do, sometimes don't — it depends on whether the property was includible in the decedent's gross estate. This is one of the areas where a 30-minute call with a CPA pays for itself.

Sources

• IRC §1014 — Basis of property acquired from a decedent
• IRS Publication 559 — Survivors, Executors, and Administrators
• IRS Topic 703 — Basis of Assets

Frequently asked questions