Capital Gains Tax on Inherited Property: The Complete Guide (2026)

Inheriting property — whether it is a family home, a stock portfolio, or other investments — raises an immediate question: how much tax will you owe when you sell? The answer depends on one of the most taxpayer-friendly provisions in the Internal Revenue Code: the stepped-up basis. This guide explains exactly how capital gains tax works on inherited property, walks through real calculation examples, and outlines strategies to keep your tax bill as low as legally possible.

Unlike property you buy yourself, inherited assets receive a new cost basis equal to their fair market value on the date the previous owner passed away. This single rule can eliminate decades of accumulated gains and save heirs tens or even hundreds of thousands of dollars in taxes. But the rules differ depending on the asset type, whether a trust is involved, and which state you live in.

How Inherited Property Is Taxed

When you inherit property, you do not owe income tax on the inheritance itself. The IRS does not treat an inheritance as taxable income — it is not reported on your Form 1040 as wages, dividends, or other income. This is fundamentally different from, say, winning a prize or receiving compensation.

However, capital gains tax does apply if you later sell the inherited property for more than its stepped-up basis. The gain — the difference between your sale price and the fair market value at the date of death — is subject to federal long-term capital gains tax at rates of 0%, 15%, or 20%, depending on your taxable income.

A critical benefit: under IRC Section 1223(9), inherited property is automatically deemed to have been held for more than one year, regardless of how long the decedent actually owned it or how quickly you sell after inheriting. This means every sale of inherited property qualifies for preferential long-term capital gains rates — never the higher short-term (ordinary income) rates.

Stepped-Up Basis Rules

The stepped-up basis (IRC §1014) is the cornerstone of inherited property taxation. It resets the cost basis of an inherited asset to its fair market value (FMV) on the date of the decedent's death. All unrealized gains that accumulated during the decedent's lifetime are permanently eliminated — they are never taxed.

How it works in practice

Suppose your father bought 1,000 shares of a stock in 1990 for $5 per share (total basis: $5,000). By the time he passes away in 2026, the stock is worth $150 per share (total value: $150,000). Under normal rules, selling would produce a $145,000 gain. But because you inherited the stock, your new basis is $150,000 — the fair market value at death. If you sell immediately at $150,000, your capital gain is $0.

This step-up applies broadly to nearly all inherited assets:

• Stocks, bonds, mutual funds, and ETFs
• Real estate (primary residences, rental properties, vacation homes, land)
• Business interests (partnerships, LLCs, sole proprietorships)
• Collectibles (art, jewelry, antiques, coins)
• Cryptocurrency (treated as property by the IRS)

When basis steps down

If the asset has declined in value since the decedent purchased it, the basis is "stepped down" to the lower FMV at death. You cannot claim the decedent's higher original purchase price as your basis. This prevents heirs from creating artificial losses on depreciated assets.

Alternate valuation date

The executor of the estate may elect to use the alternate valuation date — exactly six months after the date of death — if doing so reduces the total value of the gross estate. This election (made on the estate tax return, Form 706) affects the stepped-up basis for all assets in the estate, not just selected ones. It is typically used when markets have declined in the six months following death.

How to Determine Fair Market Value at Date of Death

Getting the fair market value right is critical — it sets your cost basis and directly determines how much gain (or loss) you report when you sell. The method depends on the asset type.

Publicly traded securities

For stocks, ETFs, and mutual funds listed on public exchanges, FMV is the average of the high and low trading prices on the date of death. If the date of death falls on a weekend or holiday when markets are closed, use the weighted average of the trading days immediately before and after.

Example: If the stock traded between $48 and $52 on the date of death, the FMV is ($48 + $52) / 2 = $50 per share.

Real estate

Real estate requires a qualified appraisal by a licensed, certified appraiser as of the date of death. The appraisal should use comparable sales and be documented thoroughly — the IRS can challenge valuations that appear too high or too low. Some estates order two independent appraisals for high-value properties.

If the property is eventually sold within a short period after death (within a few months), the actual sale price may serve as strong evidence of FMV, potentially eliminating the need for a separate appraisal.

Closely held businesses

Valuing a private business interest typically requires a professional business valuation, considering factors like revenue, earnings, comparable transactions, and applicable discounts for lack of marketability or minority interest.

Cryptocurrency

Use the spot price on the specific exchange where the decedent held the crypto at the time of death (or the daily average price if the exact time is unknown). Document the source of pricing data carefully.

Calculating Capital Gains on Inherited Property

The formula for calculating capital gains on inherited property is straightforward once you have established the stepped-up basis:

1. Determine your stepped-up basis: Fair market value on date of death (or alternate valuation date)
2. Add any improvements: For real estate, add the cost of capital improvements you made after inheriting (not maintenance)
3. Subtract selling costs: Commissions, transfer taxes, attorney fees
4. Calculate net gain: Sale price − adjusted basis − selling costs = taxable gain
5. Apply long-term capital gains rates: 0%, 15%, or 20% based on your total taxable income

Worked Example 1: Inherited house

Your mother purchased a home in 1995 for $120,000. She passed away in March 2026 when the home was appraised at $485,000. You inherit the house and sell it in September 2026 for $510,000.

• Stepped-up basis: $485,000
• Improvements after inheriting: $0
• Selling costs (agent commission, closing costs): $32,000
• Net sale price: $510,000 − $32,000 = $478,000
• Capital gain: $478,000 − $485,000 = −$7,000 (capital loss)

In this case, you actually have a capital loss of $7,000 that can offset other gains or up to $3,000 of ordinary income. Without the step-up, the gain would have been $510,000 − $120,000 = $390,000 — a potential tax bill exceeding $58,000. The stepped-up basis saved you tens of thousands of dollars.

Worked Example 2: Inherited stock portfolio

You inherit a diversified stock portfolio valued at $300,000 on the date of your father's death. His original cost basis was $75,000 (accumulated over 30 years of investing). You hold the portfolio for two more years, then sell it for $360,000.

• Stepped-up basis: $300,000
• Sale price: $360,000
• Capital gain: $360,000 − $300,000 = $60,000
• Your filing status: Single, taxable income $90,000 (including the gain)
• Tax rate: 15% (taxable income between $49,450 and $545,500)
• Federal tax owed: $60,000 × 15% = $9,000

Without the step-up, the gain would have been $285,000 with a tax bill of $42,750. The stepped-up basis reduced your tax by over $33,000.

Worked Example 3: Partial sale of inherited property

You inherit a rental property worth $600,000 at death. You sell a 50% interest to a co-investor for $330,000 two years later (the property has appreciated).

• Your basis in the sold portion: 50% × $600,000 = $300,000
• Sale price: $330,000
• Capital gain: $330,000 − $300,000 = $30,000

Inherited Stocks vs. Inherited Real Estate vs. Inherited Crypto

While the stepped-up basis applies to all inherited property, the practical considerations differ significantly by asset type.

Inherited stocks and securities

• Basis determination: Easy — use average of high/low on date of death from public market data
• Holding period: Automatically long-term regardless of sale timing
• Broker reporting: Your broker will typically update the cost basis to the stepped-up value once notified of the inheritance (via transfer-on-death or estate account)
• Dividends: Dividends received after death are taxable income to the heir — they are not part of the basis step-up
• Wash sale concerns: Not applicable to inherited positions since you did not purchase them

Inherited real estate

• Basis determination: Requires a formal appraisal — more complex and potentially contentious with the IRS
• Depreciation: If you use inherited property as a rental, you must depreciate it starting from the stepped-up basis (27.5 years for residential, 39 years for commercial). This depreciation reduces your basis over time.
• Section 121 exclusion: If you live in an inherited home as your primary residence for at least 2 of the 5 years before selling, you may qualify for the $250,000/$500,000 home sale exclusion — in addition to the stepped-up basis. See our real estate capital gains guide for details.
• 1031 exchange: You can do a tax-deferred 1031 exchange with inherited investment property, deferring any post-inheritance gain into a replacement property
• Depreciation recapture: Only depreciation taken after inheriting is subject to recapture (at up to 25%). Pre-death depreciation is wiped out by the step-up.

Inherited cryptocurrency

• Basis determination: Use the spot price on date of death — document the source exchange and timestamp
• IRS reporting: Crypto is treated as property (IRS Notice 2014-21), so the same stepped-up basis rules apply. However, enforcement and documentation standards are evolving.
• Access challenges: If private keys are lost or inaccessible, inherited crypto may be impossible to sell — but the tax basis is still stepped up based on the value at death
• Multiple wallets/exchanges: Each coin/token lot receives its own step-up based on its individual value at death
• No broker reporting (yet): Unlike stocks, crypto exchanges do not currently report cost basis to the IRS for inherited positions — documentation is your responsibility

Special Situations: Community Property States

If you live in a community property state, you may receive an even larger tax benefit when a spouse dies. In these states, both halves of community property receive a stepped-up basis at the first spouse's death — not just the decedent's half. This is sometimes called the "double step-up."

The nine community property states are:

• Arizona
• California
• Idaho
• Louisiana
• Nevada
• New Mexico
• Texas
• Washington
• Wisconsin

Alaska allows couples to opt into community property treatment through a trust agreement.

Why this matters

In a common law state, when one spouse dies, only the decedent's 50% ownership share receives a step-up. The surviving spouse's half retains its original basis. In a community property state, 100% of jointly owned community property gets a new basis at FMV on the date of death.

Example: A married couple in California bought stock together for $50,000 (community property). At the first spouse's death, it is worth $500,000.

• Community property state (California): The surviving spouse's new basis is $500,000 (full step-up on both halves). Selling immediately produces $0 gain.
• Common law state: Only the decedent's half gets stepped up. New basis = $25,000 (surviving spouse's original half) + $250,000 (stepped-up decedent half) = $275,000. Selling at $500,000 produces a $225,000 gain.

The difference — $225,000 in additional taxable gain — could cost more than $33,750 in federal taxes alone. This is one of the most significant but often overlooked tax benefits of community property states. See our state tax comparison for more details on how different states handle capital gains.

Inherited Property Held in Trust

Many families use trusts as part of their estate plan. The tax treatment of inherited property held in a trust depends on the type of trust and how the property is distributed to beneficiaries.

Revocable living trusts (grantor trusts)

Assets in a revocable living trust receive a full stepped-up basis at the grantor's death — exactly the same as assets passing directly through a will or by beneficiary designation. For tax purposes, revocable trust assets are treated as owned by the grantor, so the step-up applies normally under IRC §1014.

Irrevocable trusts

Irrevocable trusts are more complex. Whether assets receive a step-up depends on whether they are included in the decedent's gross estate for estate tax purposes:

• Included in gross estate: Assets receive a stepped-up basis. This includes trusts where the grantor retained certain powers or interests (e.g., a retained life estate).
• Not included in gross estate: Assets do not receive a step-up. The trust's original basis carries through to beneficiaries. This is common with completed gift trusts established years before death.

Trust distributes property to beneficiary vs. trust sells property

If the trust distributes the property to a beneficiary and the beneficiary sells it, the beneficiary reports the gain on their personal return using their individual tax rates and brackets.

If the trust sells the property before distributing proceeds, the trust itself may owe capital gains tax — and trust tax brackets are far more compressed. In 2026, trusts and estates reach the top 20% capital gains rate at only about $15,450 in income, compared to $545,500 for single individuals. This means selling within the trust can result in significantly higher taxes.

Intentionally Defective Grantor Trusts (IDGTs)

IDGTs are a common estate planning tool. During the grantor's lifetime, the trust is "defective" for income tax purposes (income is taxed to the grantor). At death, whether assets get a step-up depends on whether they are pulled back into the gross estate. Many IDGTs are structured so that assets are not included — meaning no step-up. This is a key tradeoff between estate tax savings and capital gains tax implications.

Reporting Requirements — Which Forms to File

When you sell inherited property, you must report the transaction to the IRS. Here are the forms involved:

Form 8949 — Sales and Other Dispositions of Capital Assets

This is where you report each individual sale. For inherited property:

• Column (a): Description of property (e.g., "500 shares XYZ Corp — inherited")
• Column (b): Date acquired — enter "INHERITED" (or the date of death)
• Column (c): Date sold
• Column (d): Sale proceeds
• Column (e): Cost or other basis (your stepped-up FMV at death)
• Column (f): Adjustment code — use code "H" if the basis reported by your broker differs from the stepped-up basis

Report inherited property sales in Part II (long-term) regardless of how soon after inheritance you sell, since inherited property is always treated as long-term.

Schedule D (Form 1040) — Capital Gains and Losses

Schedule D summarizes your total capital gains and losses from Form 8949. Long-term gains from inherited property go on Line 8a (if reported on a 1099-B with basis reported to the IRS) or Line 8b (if basis was not reported). The net result flows to your Form 1040.

Form 8960 — Net Investment Income Tax

If your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly), you may owe the additional 3.8% NIIT on gains from inherited property sales. Calculate this on Form 8960.

State returns

Most states that tax capital gains require you to report the same gain on your state return. Some states have additional forms or schedules. A few states (like those with no income tax) require no reporting at all.

What if you don't have documentation?

If the executor did not obtain an appraisal or document the date-of-death values, you must reconstruct them. Options include:

• Historical stock prices from financial databases (Yahoo Finance, Bloomberg)
• Retrospective real estate appraisals (an appraiser can estimate value as of a past date)
• County tax assessor records (imperfect but useful as supporting evidence)
• Comparable sales data from the period around the date of death

Strategies to Minimize Tax on Inherited Property

While the stepped-up basis already provides enormous tax savings, there are additional strategies to minimize what you owe when you eventually sell inherited assets.

1. Sell immediately (or near the date of death)

If you sell inherited property close to the date of death, the sale price and stepped-up basis will be nearly identical — producing little or no taxable gain. This is the simplest strategy and is often appropriate for liquid assets like stocks that you do not want to hold.

2. Live in the inherited home to qualify for the Section 121 exclusion

If you inherit a home and live in it as your primary residence for at least 2 of the 5 years before selling, you can exclude up to $250,000 (single) or $500,000 (married filing jointly) of gain beyond the stepped-up basis. Combined with the step-up, this can shelter enormous appreciation from tax entirely. Learn more in our real estate capital gains guide.

3. Use tax-loss harvesting to offset gains

If you have other investments with unrealized losses, sell those in the same year you sell the inherited property. Losses offset gains dollar-for-dollar. See our guide on how to reduce capital gains tax for more strategies.

4. Time the sale for a low-income year

If you can control when you sell, choose a year when your other income is low. If your total taxable income (including the gain) stays below $49,450 (single) or $98,900 (MFJ) for 2026, your long-term capital gains rate is 0%. This is particularly powerful for retirees or those between jobs.

5. Installment sale

Spread the gain over multiple years by selling with seller financing (an installment sale reported on Form 6252). You recognize gain only as you receive payments, potentially keeping each year's income in a lower bracket. This works well for high-value real estate.

6. Donate appreciated inherited property to charity

If you donate inherited property that has appreciated since the date of death directly to a qualified charity (or to a donor-advised fund), you avoid capital gains tax and receive a charitable deduction for the full fair market value. This effectively doubles the tax benefit.

7. 1031 exchange for investment property

If the inherited property is investment or business-use real estate, you can defer the entire gain through a like-kind exchange under Section 1031. Exchange into another investment property and the gain is deferred indefinitely — potentially until death, when the next generation gets another step-up.

8. Distribute from trust before selling

As discussed in the trusts section, having the trust distribute appreciated property to beneficiaries before sale avoids the highly compressed trust tax brackets. The beneficiary's individual rates (often much lower) apply instead.

Frequently Asked Questions

Do I have to pay capital gains tax on inherited property?

Only if you sell it for more than its stepped-up basis (fair market value at the date of death). The inheritance itself is not taxable income. If you sell at or below the date-of-death value, you owe no capital gains tax — and may even have a deductible loss.

What is the stepped-up basis and how does it save me money?

The stepped-up basis resets your cost basis to the asset's fair market value on the date the previous owner died. This eliminates all gains that accumulated during their lifetime. For example, if they bought property for $50,000 and it was worth $400,000 at death, your basis is $400,000 — not $50,000. You only pay tax on appreciation after the date of death.

Is inherited property always considered long-term for tax purposes?

Yes. Under IRC §1223(9), inherited property is automatically deemed held for more than one year, regardless of how long the decedent owned it or how quickly you sell. This qualifies you for the preferential 0%/15%/20% long-term capital gains rates rather than ordinary income rates up to 37%.

What is the difference between estate tax and capital gains tax?

Estate tax is paid by the estate before assets are distributed to heirs — and only applies to estates exceeding $13.99 million per person in 2026 (very few Americans). Capital gains tax is paid by the heir when they sell an inherited asset for more than its stepped-up basis. They are separate taxes that apply at different times to different parties.

Do I get a double step-up in community property states?

Yes. In the nine community property states (AZ, CA, ID, LA, NV, NM, TX, WA, WI), both halves of community property receive a stepped-up basis when one spouse dies. In common law states, only the decedent's half gets the step-up. This can save the surviving spouse tens of thousands in taxes on jointly held assets.

How do I report the sale of inherited property on my tax return?

Report the sale on Form 8949 (Part II for long-term) and summarize on Schedule D. Enter "INHERITED" as the acquisition date. Use the stepped-up FMV as your cost basis. If your broker reported a different basis, use adjustment code "H" to correct it. If your MAGI exceeds $200,000/$250,000, also complete Form 8960 for the 3.8% NIIT.