You generally don't pay capital gains tax on the inheritance itself, but when you sell an inherited asset, the tax applies only to the profit above its value at the time of the original owner's death (the "stepped-up basis"), not the original purchase price. This step-up significantly reduces or eliminates taxes on appreciation during the deceased's lifetime, with the taxable gain being the difference between the sale price and the date-of-death value, reported on Schedule D.
You can avoid capital gains taxes on inherited property by minimizing the time for appreciation. Selling immediately after inheritance typically results in minimal capital gains tax because there's little time for the property to appreciate beyond its stepped-up basis.
Not on the inheritance itself. California has no inheritance tax or estate tax. You only owe capital gains tax when you sell the property, and only on appreciation above the stepped-up basis.
Typically, when you inherit an asset, capital gains tax will not apply. However, when you sell an asset that you have inherited, CGT may become relevant to any money you make from the sale of the asset.
A Beneficiary will not usually be liable to pay Capital Gains Tax on their inheritance. However, if an asset is transferred to them from the Estate (such as shares or a property, for example) and they then sell this at a later date for a profit, they may become liable for Capital Gains Tax at this stage.
To avoid capital gains tax on inheritance, sell inherited assets immediately at their stepped-up basis (value at death) to realize no gain, use it as your primary residence for the Section 121 exclusion, donate it to charity, or use a 1031 exchange for real estate; the key is leveraging the "stepped-up basis" to erase prior gains, as the cost basis resets to the value on the date of death, notes Gudorf Law and SmartAsset.com.
The beneficiaries or heirs who inherit properties from the estate may also have a responsibility to pay capital gains taxes. Capital gains taxes are a federal tax imposed on the revenue generated after the sale of an asset that has appreciated in value.
How to calculate Capital Gains Tax on inherited property
You can typically inherit a very large amount from your parents without paying federal tax, as the federal estate tax exemption is around $15 million per person for 2026, meaning only estates larger than that pay tax, not you directly. While you generally don't pay income tax on inheritances (except for pre-tax retirement funds like IRAs/401(k)s, which are taxed as income when withdrawn), some states have their own estate or inheritance taxes with much lower thresholds, affecting a smaller portion of wealth.
The 20% rule for capital gains refers to the highest federal tax rate for long-term capital gains, applying to higher income brackets when you sell investments (stocks, real estate) held for over a year, with lower rates of 0% and 15% for lower incomes, and even higher rates for special assets like collectibles. This rate kicks in for single filers earning over approximately $492,300 (2024) or $533,401 (2025), and higher for joint filers, making holding assets over a year a key tax strategy.
Children generally inherit significant amounts tax-free due to the high federal estate tax exemption, which is $13.99 million per individual for 2025, with a planned reversion to a lower amount ($5 million adjusted for inflation) in 2026, meaning very large estates are taxed, but most inheritances fall below this threshold, though some states have their own inheritance taxes. Heirs also benefit from the "step-up in basis," which lowers capital gains tax on inherited assets like stocks and real estate.
If the home value goes down and you sell the property for less than the value at which you inherited it, then you would also not incur any capital gains tax. The IRS considers inherited property to be long-term capital gain. The tax rate would be 0%, 15%, or 20%, depending on your income bracket.
Give more money away
Lifetime gifting is a straightforward way to begin reducing your IHT bill. By gifting money during lifetime, that would have been part of an inheritance anyway, you reduce the size of your estate so that there is smaller amount subject to IHT on your death.
The "7-year inheritance rule" (primarily a UK concept) means gifts you give away become exempt from Inheritance Tax (IHT) if you live for seven years or more after making the gift; if you die within that time, the gift may be taxed, often with a reduced rate (taper relief) applied if you die between years 3 and 7, but at the full 40% if you die within 3 years, helping people reduce their estate's taxable value by giving assets away earlier.
Inheriting $100,000 or more is often considered sizable. This sum of money is significant, and it's essential to manage it wisely to meet your financial goals. A wealth manager or financial advisor can help you navigate how to approach this.
Do I pay Capital Gains Tax as well as Inheritance Tax? In theory, a transaction can be subject to both Capital Gains Tax and Inheritance Tax (IHT). For example, CGT could be due on the sale of shares or property in the estate if they've increased in value since the IHT valuation.
The "6-year rule" for Capital Gains Tax (CGT) in Australia allows you to treat a former main residence as tax-exempt for up to six years after you move out, even if you rent it out, enabling you to avoid CGT on any growth during that period. You qualify by moving out, choosing to treat it as your main home for tax, and can reset the rule by moving back in. If you rent it out for longer than six years, only the portion of the gain after the six-year mark becomes taxable.
Subtract your basis (what you paid) from the realized amount (how much you sold it for) to determine the difference. If you sold your assets for more than you paid, you have realized capital gains amount.
To avoid capital gains tax on inheritance, sell inherited assets immediately at their stepped-up basis (value at death) to realize no gain, use it as your primary residence for the Section 121 exclusion, donate it to charity, or use a 1031 exchange for real estate; the key is leveraging the "stepped-up basis" to erase prior gains, as the cost basis resets to the value on the date of death, notes Gudorf Law and SmartAsset.com.
For larger estates or complex family situations, trusts can distribute capital property to beneficiaries tax-free. Each beneficiary can then use their personal lifetime capital gains exemption of $1.25 million for qualified small business shares or farm property.
CGT doesn't usually apply at the time you inherit the dwelling, however it will apply when you later sell or dispose of the dwelling, unless an exemption applies. if you dispose of the inherited property within 2 years (or the within an extension period) of the deceased person's death.