When you inherit property, the IRS applies what is known as a stepped-up cost basis. You do not automatically pay taxes on any property that you inherit. If you sell, you owe capital gains taxes only on any gains that the asset made since you inherited it.
Your share of sales proceeds (generally reported on Form 1099-S Proceeds From Real Estate Transactions) from the sale of an inherited home should be reported on Schedule D (Form 1040) Capital Gains and Losses in the Investment Income section of TaxAct.
An inherited home that's treated as an investment property for tax purposes would still be subject to capital gains tax if you decide to sell it. But you could defer paying those taxes if you complete a 1031 exchange to purchase another investment property to replace the one you're selling.
When a house is transferred via inheritance, the value of the house is stepped up to its fair market value at the time it was transferred, according to the IRS. This means that a home purchased many years ago is valued at current market value for capital gains.
Gifts and inheritance Personal income types
If you received a gift or inheritance, do not include it in your income. However, if the gift or inheritance later produces income, you will need to pay tax on that income.
Report the sale on Schedule D (Form 1040), Capital Gains and Losses and on Form 8949, Sales and Other Dispositions of Capital Assets: If you sell the property for more than your basis, you have a taxable gain.
A taxpayer might not receive the form in these scenarios that involve real estate or a building: Sale of a main home for $250,000 or less if the seller is unmarried, or $500,000 or less if married, and the seller is excluding the entire gain from gross income (with some exceptions).
Taxpayers who don't qualify to exclude all of the taxable gain from their income must report the gain from the sale of their home when they file their tax return. Anyone who chooses not to claim the exclusion must report the taxable gain on their tax return.
The federal government doesn't have an inheritance tax. As of 2024, six states impose an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Generally, the value of the inherited assets has to exceed minimum amount before an inheritance tax is due.
Seniors must pay capital gains taxes at the same rates as everyone else—no special age-based exemption exists.
Inherited properties can come with financial responsibilities such as existing mortgages, unpaid property taxes, maintenance costs, and insurance requirements. Be aware of hidden costs, including emergency repairs, property management fees, and legal expenses.
Here are the taxes you have to pay when selling an inherited property in California: Transfer Tax: A transfer tax is a fee the government changes when real estate ownership changes. In California, it is at a flat rate of $1.10 per $1000 of the sale price.
Many people worry about the estate tax affecting the inheritance they pass along to their children, but it's not a reality most people will face. In 2025, the first $13,990,000 of an estate is exempt from federal estate taxes, up from $13,610,000 in 2024. Estate taxes are based on the size of the estate.
If you are inheriting a house that is paid off, in most cases, you will still need to go through probate. Some states may allow you to bypass probate if a quitclaim deed was executed properly. However, it is likely that you will still need to go through probate even if you are inheriting a house with no mortgage.
Additionally, you must report the sale of the home if you can't exclude all of your capital gain from income. Use Schedule D (Form 1040), Capital Gains and Losses and Form 8949, Sales and Other Dispositions of Capital Assets when required to report the home sale.
If it's your primary residence
You can sell your primary residence and avoid paying capital gains taxes on the first $250,000 of your profits if your tax-filing status is single, and up to $500,000 if married and filing jointly. The exemption is only available once every two years.
It is typically filed by the person or entity responsible for closing the transaction, such as the settlement agent, closing agent, or real estate attorney.
Report the sale on Schedule D (Form 1040), Capital Gains and Losses and on Form 8949, Sales and Other Dispositions of Capital Assets: If you sell the property for more than your basis, you have a taxable gain.
Inheritance checks are generally not reported to the IRS unless they involve cash or cash equivalents exceeding $10,000. Banks and financial institutions are required to report such transactions using Form 8300. Most inheritances are paid by regular check, wire transfer, or other means that don't qualify for reporting.
You can ensure your heirs don't incur any capital gains tax penalties by divesting the asset when your affairs are being settled through probate, but your estate will be liable for any long-term capital gains taxes realized from the sale.
While California may not impose an inheritance tax or an estate tax, there are still taxes associated with selling an inherited property: Capital Gains Tax: Capital gains tax is applied on a stepped-up basis, meaning it's only relevant to any increase in the property's value after inheritance.
Bottom Line. California doesn't enforce a gift tax, but you may owe a federal one. However, you can give up to $19,000 in cash or property during the 2025 tax year and up to $18,000 in the 2024 tax year without triggering a gift tax return.
In general, you will report your capital gains or losses, from inherited property on Form 8949/Schedule D, like other property.