Capital Gains on Inherited Property
Inheriting stocks, a house, or other property comes with one of the most generous rules in the tax code: the stepped-up basis. When you inherit an asset, its cost basis resets to the fair market value on the date of death. Decades of the previous owner's gains simply vanish for capital gains purposes. Only growth after you inherit is ever taxed, and when you sell, you can estimate the bill with the free capital gains tax calculator.
In short: your basis is the value on the date of death, not what the deceased paid. Any gain when you sell is automatically treated as long-term, no matter how briefly you held it, so the friendlier 0%/15%/20% rates apply.
How the stepped-up basis works
Normally your cost basis is what you paid for an asset. For inherited property, the basis is generally the asset's fair market value on the date the previous owner died (IRS rules in Publication 551, Basis of Assets and the IRS Gifts & inheritances FAQ). If your parent bought shares for $50,000 that were worth $400,000 when they died, your basis is $400,000. The $350,000 of gain that built up during their lifetime is never subject to capital gains tax.
Selling is always long-term
Inherited property gets an automatic long-term holding period. Even if you sell a week after inheriting, the gain or loss counts as long-term, which means the 0%, 15%, or 20% brackets rather than ordinary income rates. In the calculator, choose "More than 1 year" for an inherited sale.
A worked example
Say you inherit shares valued at $400,000 on the date of death and sell them a few months later for $420,000. Your taxable gain is only $20,000 (sale price minus stepped-up basis). For a single filer with $60,000 of taxable income, that long-term gain falls in the 15% bracket: about $3,000 of federal tax. Your state may add its own tax on the $20,000; see how every state treats capital gains.
What the step-up does not do
- It does not erase gains after death. Growth between the date of death and your sale is taxable to you.
- It is not the home-sale exclusion. Inheriting a house does not by itself give you the $250,000/$500,000 exclusion; that requires the home to be your own primary residence with the 2-of-5-year tests.
- Gifts are different. Property given to you during the owner's lifetime generally keeps the giver's original (carryover) basis, not a stepped-up one. Inheriting and being gifted the same asset can produce very different tax bills.
- Some assets never step up. Retirement accounts like traditional IRAs and 401(k)s do not get a basis step-up; withdrawals are taxed as ordinary income to the beneficiary.
Frequently asked questions
Do I pay capital gains tax on inherited property?
Not on the value at death. Your basis steps up to the fair market value on the date of death, so tax applies only to appreciation after you inherit, and only when you sell. If you sell quickly at roughly the date-of-death value, there is usually little or no capital gains tax.
Is the sale of inherited property short-term or long-term?
Always long-term, regardless of how long you actually held it. The tax code treats inherited property as held for more than one year, so the 0%, 15%, or 20% long-term rates apply instead of ordinary income rates.
What if I inherit a house and live in it?
You start with the stepped-up basis, and if you then own and use the house as your primary residence for at least 2 of the 5 years before selling, you can also claim the home-sale exclusion of up to $250,000 ($500,000 married filing jointly) on gains above that basis.
More guides
- Capital Gains Tax Explained: Short-Term vs Long-Term (2026)
- The home sale tax exclusion: $250k/$500k rule
- State capital gains tax rates by state
This guide is general information, not tax, legal, or financial advice. Estate and basis rules have exceptions (community property states, alternate valuation dates, and more) that depend on your situation. Confirm details with a tax professional or the IRS.
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