Generally, the capital gains pass through to the heirs. The estate reports the gain on the estate income tax return, but then takes a deduction for the amount of the gain distributed to the heirs since this usually happens during the same tax year.
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.
The basis of an asset is its original cost for tax purposes. The "step-up" increases the property's basis to its fair market value (FMV) at the time of the decedent's death. For tax purposes, this step-up can eliminate much of the capital gains liability if the property is later sold.
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.
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.
In most cases, an inheritance isn't subject to income taxes. The assets passed on in an investment or bank account aren't considered taxable income, nor is life insurance. However, you could pay income taxes on the assets in pre-tax accounts.
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.
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%.
Determine the cost basis of your assets, which is the original value of the asset, plus any improvements and minus any depreciation. Subtract the cost basis from the selling price. The resulting number is your capital gain (or loss).
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.
The good news is no matter if you decide to move into an inherited home or keep it as a rental, so long as you itemize your deductions, you'll be able to deduct the property taxes.
Estate Tax: Texas has no state estate tax. The federal estate tax only applies to very large estates exceeding $13.8 million in 2024. It's a tax on the estate itself, not the inheriting individual.
Some states have estate taxes with lower minimum inclusions, but typically with exceptions for close family members. In most cases, heirs don't pay capital gains taxes. Instead, the asset is valued at a stepped-up basis—the value at the time of the owner's demise.
The straightforward answer is no, and there is no specific time limit on selling an inherited property. However, certain factors will influence the timeline of the sale process. Understanding these nuances is key to ensuring a smooth and compliant sale.
You don't need to report a cash inheritance on your federal return. The IRS doesn't impose an inheritance tax. Only a handful of states (Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania) have some kind of inheritance tax.
The capital gains tax only applies if the sale of the inherited property yields a profit, which is calculated as the difference between the selling price and the property's value at the time of the previous owner's passing.
While beneficiaries don't owe income tax on money they inherit, if their inheritance includes an individual retirement account (IRA), they will have to take distributions from it over a certain period and, if it is a traditional IRA rather than a Roth, pay income tax on that money.
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.
It depends on your personal circumstances. If you want to live in the home or use it as a rental property, keeping it obviously makes sense. If you don't want to do either — or if it needs significant work that you don't want to commit to — selling it will make more sense.
If you inherit a house, changing the deed is one of the first things you'll want to do. It's an important step that ensures your name is on the deed and proves your legal entitlement to the property moving forward. Here's a step by step guide that breaks down this process.
Some also worry that the home will be sold quickly, against their wishes. And there is good reason to be concerned. If you bequeath a house to an heir or heirs, they will have to make an immediate plan for home maintenance, mortgage payments (if necessary), utilities, property taxes, repairs and homeowners' insurance.