When you inherit a home or stocks, the stepped-up basis rule resets your cost to date-of-death value. See how it cuts capital gains tax and where it stops.
If you’ve just inherited a house or a brokerage account, you’re probably wondering what you’ll owe if you sell. The short answer for most beneficiaries is less than they want, and the reason is the stepped-up basis rule. It allows the tax burden on most inherited assets to reset to the asset’s value at the time of the owner’s death, meaning that decades of growth can be achieved without triggering any taxes. The specifics will vary based on the type of paperwork it’s found in, and how it was stated, so you should familiarize yourself with JT TEN meaning before selling.
How the stepped-up basis works
Your “basis” is the starting figure the IRS uses to calculate your gain when you sell. For inherited property, the IRS says your basis is generally the fair market value on the date of death, whether or not the estate files an estate tax return. Your gain is the sale price minus that value, not minus what the original owner paid.
The rule can also work in reverse. If an asset has dropped in value, your basis steps down to the lower figure. Inherited assets are also automatically treated as long-term holdings, so any gain is taxed at long-term capital gains rates even if you sell the day after you inherit.
A worked example
This is a hypothetical example. Your mother bought a house in 1990 for $120,000, and it’s worth $500,000 when she dies. You sell it a year later for $540,000 and pay $30,000 in selling costs.
| Without a step-up | With a step-up | |
|---|---|---|
| Net sale proceeds | $510,000 | $510,000 |
| Basis | $120,000 | $500,000 |
| Taxable gain | $390,000 | $10,000 |
That’s the main idea behind any inherited house capital gains tax calculation. Only the growth after the date of death is taxed. Any improvements you make after inheriting also increase your basis.
What gets a step-up and what doesn’t
| Generally steps up | Generally does not |
|---|---|
| Real estate and personal property in the estate | Traditional IRAs and 401(k)s |
| Stocks, funds and other investments | Gifts made during the owner’s lifetime |
| Assets in a revocable living trust | Assets in an irrevocable grantor trust kept outside the estate |
Retirement accounts get no step-up, and withdrawals are taxed as ordinary income. Lifetime gifts use the giver’s original basis instead. The IRS also confirmed in Revenue Ruling 2023-2 that assets in an irrevocable grantor trust don’t step up if they aren’t included in the owner’s estate.
Cash has no gain to step up at all. If your inheritance is mostly money, our guide to I inherited 100k, what should I do is a better starting point. Other windfalls don’t follow these rules either.
Special situations
Spouses.
In community property states, both halves of community property get a full step-up when one spouse dies. In other states, jointly owned property usually steps up only on the deceased spouse’s half.
The six-month election.
An executor can value assets six months after death instead, but only if an estate tax return is filed and the election lowers both the estate’s value and its tax. With the federal exemption at $15 million per person in 2026, very few estates qualify.
The one-year rule.
If you give appreciated property to someone who dies within a year and it comes back to you, it doesn’t get a step-up.
Lottery winnings are taxed as ordinary income, and a lottery annuity calculator can help you compare lump-sum and annuity payouts.
What to do after you inherit
- Get a professional appraisal as of the date of death, and save statements showing account values on that date.
- Ask the executor whether an estate tax return was filed. If one was, you may receive Schedule A (Form 8971) showing the value you must use.
- Keep receipts for any improvements and selling costs.
- When you sell, report it on Form 8949 and Schedule D, entering “INHERITED” as the acquisition date.
- Check your state’s rules, since some states charge their own inheritance or estate taxes.
Common mistakes
The most expensive mistake is using the original owner’s purchase price as your basis, which means paying tax on gains that should have been wiped out. Another is claiming a basis higher than the value reported for estate tax purposes, which can trigger an accuracy-related penalty. Some heirs also assume the home sale exclusion applies, but it only helps if you actually live in the home as your main residence before selling.
The Bottom Line
The stepped up basis benefit that an heir receives is one of the better tax advantages available to him but it only works if one documents the date of death value and then takes advantage of it appropriately. Get an evaluation early, take the papers with you when you report what was said to the executor, and hold the papers together until you sell. In cases where a number of assets or a trust are involved, it may be useful to have a fee-only financial planner work in tandem with a tax preparer to prevent making expensive mistakes.
This article provides general information and is not tax or legal advice.
FAQs
1. Do you pay capital gains tax when you inherit a house?
Not when you inherit it. You only owe tax on the gain above your stepped-up value if you later sell.
2. How do I find the cost basis of inherited property?
Use a professional appraisal or market data from the date of death. If the estate filed Form 706, use the value reported on Schedule A of Form 8971.
3. Does a house in a revocable trust get a stepped-up basis?
Generally, yes. Revocable trust assets are part of the owner’s estate, so they qualify for the step-up like inherited property.
4. Is there an inherited property tax at the federal level?
No, the federal government doesn’t tax heirs on what they receive, and estate tax only applies to very large estates. A handful of states do charge an inheritance tax, so check your state’s rules.