How to Avoid (or Minimize) Capital Gains on an Inherited House

Sell as soon as practical after death

The step-up locks in basis at the death date. Selling within 6–12 months means almost no additional appreciation has accrued, so the taxable gain stays near zero. Holding for years exposes you to post-death appreciation that is taxable.

Claim every eligible selling expense

Commission, transfer tax, recording fees, attorney fees, and the cost of the date-of-death appraisal all reduce gain. Track them carefully — they're a dollar-for-dollar offset.

Split the sale among heirs

Each heir's share of gain (or loss) flows to their own 1040. If three siblings split the proceeds, the gain is split three ways and may fall into a lower bracket — including the 0% long-term capital gains bracket for joint filers under ~$94K of taxable income in 2025.

Move in and use the home-sale exclusion

If you make the inherited house your primary residence for two of the five years before sale, IRC §121 lets you exclude up to $250,000 ($500,000 married filing jointly) of gain. This stacks on top of the step-up.

1031 exchange (if you'll keep it as investment)

If you convert the property to a rental and later exchange into another investment property, you defer all remaining gain. Personal use during the holding period disqualifies the exchange — see our 1031 guide for the safe-harbor rules.

Sell at a loss?

If the property sells for less than the stepped-up basis (after selling costs), that's a capital loss — deductible against other gains and up to $3,000 of ordinary income per year, carrying forward indefinitely.

Sources

• IRC §1014 — Basis of property acquired from a decedent
• IRC §121 — Exclusion of gain from sale of principal residence

Frequently asked questions