Tax assessment records and local realtors can help you, but the most legally defensible estimate is from a professional appraiser. With a professional appraisal of the property, you can make sure you're being treated fairly by the executor and other heirs—and you can decide whether to sell.
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.
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.
The basis of property inherited from a decedent is generally one of the following: The fair market value (FMV) of the property on the date of the decedent's death (whether or not the executor of the estate files an estate tax return (Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return)).
How Does the IRS Verify Cost Basis in Real Estate? In real estate transactions, the Internal Revenue Service (IRS) can verify the cost basis by looking at the closing statement of when the property was purchased, or any other legal documents associated with the property, such as tax statements.
Calculating the Cost Basis of Mutual Fund Shares
Average cost method: Over time, your total investment is ($2,000 + $750) = $2,750. Since your total shares are 150 and the average cost per share is $2,750 ÷ 150 = $18.33, the cost basis for 120 shares is as follows: 120 × $18.33 = $2,200.
To calculate an asset's or security's adjusted basis, you simply take its purchase price and then add or subtract any changes to its initial recorded value. Capital gains tax is paid on the difference between the adjusted basis and the amount the asset or investment was sold for.
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.
Upon selling an inherited asset, if the inherited property produces a gain, you must report it as income on your federal income tax return as a beneficiary.
But when gains are inherited, the loophole zeroes out the gain for tax purposes. As a result, an investment sale that would create a taxable gain for the original owner is tax-free for the inheritor. Example: an investor buys 100 shares of stock for $200. Ten years later, the stock is worth $500.
The GRM method determines the market value of a property by multiplying the gross rent multiplier (GRM) by the property's annual gross rental income. The formula to compute the GRM divides the sale price of a property by its annual gross rental income, which can be rearranged to isolate the price variable.
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.
The bottom line is that the IRS expects you to maintain records that identify the cost basis of your securities. If you don't have adequate records, you might have to rely on the cost basis that your brokerage firm reports—or you may be required to treat the cost basis as zero, which could mean owing more in taxes.
The IRS expects taxpayers to keep the original documentation for capital assets, such as real estate and investments. It uses these documents, along with third-party records, bank statements and published market data, to verify the cost basis of assets.
Homeowners: A homeowner's cost basis generally consists of the purchase price of the property, plus the cost of capital improvements, minus any tax credits (like the Residential Energy Credits) that they've received.
The cost-basis figure usually equals the fair market value when the estate owner dies or the assets are transferred. A "step-up" basis means the cost basis is raised to the asset's market value on the original owner's date of death for tax purposes.
You also can't deduct or add to your home's tax basis your hazard insurance premiums, homeowners' association fees, or utility fees. What can you do to get some tax benefit from these nondeductible expenses? The best strategy is to have the seller pay these expenses and add the cost to the price of the home.
The investor would be better off from a tax standpoint by selecting the FIFO method or the high-cost method to calculate the cost basis before selling the shares. These methods would result in no tax on the loss.
Capital gains on inherited property work a little differently than other assets. When you sell the home, your entire profit isn't taxable. Instead, you're taxed on the property's sale price minus its market value on the date of the owner's death.
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.
Another key difference: While there is no federal inheritance tax, there is a federal estate tax. The federal estate tax generally applies to assets over $13.61 million in 2024 and $13.99 million in 2025, and the federal estate tax rate ranges from 18% to 40%.