Key takeaways
- Selling an inherited home can trigger capital gains taxes, but if you sell quickly at around the date-of-death value, you may owe little to nothing.
- Living in the home for at least two of the five years before selling can unlock the home sale exclusion and reduce taxable gains.
- When co-heirs disagree, they may need a court-ordered sale (partition) or a buyout arrangement.
Inheriting a home: the first decisions
When a loved one leaves you a house, you’ll face legal, financial, and emotional choices. If you’re sharing the inheritance with siblings or other relatives, their preferences matter too.
How ownership transfers
According to financial planner Chris Weeks, property can pass in several ways:
- Will: Goes through probate, which can be lengthy for larger estates (sometimes a year or more).
- Beneficiary designations: Certain assets (and in some states, real estate) can pass directly and avoid probate.
- Trusts: Assets in a properly funded trust bypass probate.
- No plan: If there’s no will or trust, state intestacy laws decide who inherits.
How owners can make transfers smoother
To help heirs avoid probate and delays, owners can:
- Name beneficiaries where allowed (e.g., payable-on-death accounts).
- Use transfer-on-death (TOD) deeds or Lady Bird deeds if available in their state.
- Create a revocable living trust to spell out who inherits what and how, while keeping full control during life.
The stepped-up basis, in plain English
Inherited property gets a “step-up in basis” to its fair market value on the date of death. Your taxable gain is the sale price minus this stepped-up basis (plus allowable adjustments).
- Example: If the home’s date-of-death value is $500,000 and you sell for $520,000, your gain is about $20,000. Sell at $500,000 and you’d have no gain.
- Practical tip: Get a professional appraisal right away to document the stepped-up basis.
- If you plan to minimize tax exposure, selling soon after inheritance often keeps gains near zero.
Taxes when you sell inherited real estate
- Long-term capital gains treatment: Heirs’ gains on inherited property are taxed as long-term, at 0%, 15%, or 20%, depending on income.
- Home sale exclusion: If you make the property your primary residence and live there 2 of the 5 years before selling, you may exclude up to $250,000 of gain if single or $500,000 if married filing jointly.
- Example: Inherit at $500,000, live there 3 years, sell at $650,000—your $150,000 gain could be fully excluded if you meet the rules.
- Inheritance tax: There’s no federal inheritance tax, but some states impose one (currently Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania). These are paid by heirs, with rates and exemptions varying by relationship.
Why consider a financial advisor
A seasoned advisor—ideally one with estate-planning experience—can help:
- Balance emotional considerations with financial decisions.
- Map out tax-efficient timing for selling or keeping the property.
- Coordinate with your overall financial plan.
Preparing the home for sale
A local agent can advise which repairs or improvements are worth doing.
- Add permanent improvements to your basis (e.g., roof, remodels), which reduces taxable gain.
- Some selling costs (like certain closing costs) may also increase basis or reduce proceeds for gain calculation.
- Keep detailed records of all expenses.
- It’s possible to have a capital loss on sale; losses may offset other gains or, in some cases, ordinary income subject to IRS rules.
Dividing proceeds among multiple heirs
- Sale proceeds are typically split by ownership share.
- Each heir reports capital gains on their portion.
- If co-owners aren’t married, the home sale exclusion is generally $250,000 per qualifying owner who meets the residency and ownership tests.
Emotional and legal pitfalls to avoid
- Disagreements among heirs are common—some may want to keep the home, others to sell.
- Options include a buyout or a partition action (court-ordered sale) if no agreement is reached.
- Debts and liens matter: Mortgages, home equity loans, or tax liens must be paid at sale, reducing net proceeds.
- Discussing wishes in advance can reduce conflict later.
FAQ
- Do I owe capital gains tax when I sell inherited property?
If the sale price exceeds the date-of-death value (adjusted for basis items), you’ll owe long-term capital gains tax on the difference. - What documents do I need before selling?
Common items include the deed, proof of your authority to sell (e.g., letters testamentary, trust documents, or recorded transfer), and receipts for improvements. A local agent can help you compile state-specific paperwork. - How long does probate take?
It varies by state and estate complexity—anywhere from a few months to over a year. - What if multiple heirs don’t agree on selling?
The heir(s) who want to keep the home can buy out others. Otherwise, a partition lawsuit can force a sale. - Should I make repairs or sell as-is?
Ask a local agent which fixes actually raise value in your market. Improvements can boost the price—and increase your basis—but they also take time and money.