Capital gains tax on inherited property is only paid on the profit made between the stepped-up basis (value at the time of the owner’s death) and the sale price. If sold shortly after inheritance, taxes are usually minimal. Long-term rates (0%–20%) typically apply, assuming the property is held for more than a year.
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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.
The critical takeaway is that capital gains are calculated based on the difference between the original purchase price (adjusted cost base) and the fair market value at the date of death.
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.
Do You Pay CGT When You Inherit Property? No, inheriting property itself does not trigger a CGT bill. Instead, the property's value is established during probate, which is referred to as the "probate value." This value becomes the baseline for calculating any potential gains if the property is sold later.
In general, any inheritance you receive does not need to be reported to the IRS. You typically don't need to report inheritance money to the IRS because inheritances aren't considered taxable income by the federal government. That said, earnings made off of the inheritance may need to be reported.
In California, real property is one of the most valuable assets you can inherit from a loved one. But inheriting real estate that has increased in value over time can trigger capital gains tax consequences when you sell that piece of property.
When someone inherits investment assets, the IRS resets the asset's original cost basis to its value at the date of the inheritance. The heir then pays capital gains taxes on that basis. The result is a loophole in tax law that reduces or even eliminates capital gains tax on the sale of these inherited assets.
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.
A common way to defer or reduce your capital gains taxes is to use tax-advantaged accounts. Retirement accounts such as 401(k) plans, and individual retirement accounts offer tax-deferred investment. You don't pay income or capital gains taxes on assets while they remain in the account.
Taxation on Selling an Inherited Property
This capital gain on the sale of ancestral property is taxed at 20.8% (including cess) with indexation and 12.5% without indexation. Also, LTCG upto Rs. 1.25 lakhs is exempt from capital gain tax under the Income Tax Act.
You may owe capital gains tax on any realized gain on the sale of an asset, but not on unrealized capital gains. Long-term capital gains — that is, on assets held for a year or longer — are taxed at a 0%, 15% or 20% rate, depending on your total taxable income for the year.
An inherited property is exempt from CGT if you dispose of it within 2 years of the deceased's death, and either: the deceased acquired the property before September 1985. at the time of death, the property was the main residence of the deceased and was not being used to produce income.
The IRS requires those who sell an inherited property to report proceeds as taxable income. The specific amount that will be taxable is based upon the fair market value and other improvements used to calculate the basis. This publication from the IRS describes where to find instructions and which forms to use.
This means the beneficiary inherits the property at its market value at the time of inheritance. If the beneficiary sells the property later at the same market value, there will be no CGT payable. This is because there has been no gain.
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. It's a progressive tax, just like the federal income tax system. This means that the larger the estate, the higher the tax rate it is subject to.
Capital gains tax rates
For example, if you hold the inherited property for more than a year, you'll pay the long-term capital gains rate, which is between 0% and 20%. If you sell the property less than a year after inheriting it, you'll pay the short-term capital gains rate, which ranges from 10% to 37%.
You'll need to add half of your profit to your income for the year. Because your profit was $100,000, you'll report $50,000 as a taxable capital gain. Your personal tax rate is then applied to the total amount of income you reported to determine how much tax you owe.
Inheriting property in California comes with financial opportunities and responsibilities. By leveraging the stepped-up basis, selling strategically, or using tax-saving tools like the principal residence exclusion or a 1031 exchange, you can minimize or avoid capital gains taxes.