> ## Documentation Index > Fetch the complete documentation index at: https://learn.hometrics.ai/llms.txt > Use this file to discover all available pages before exploring further. # Tax Implications > Stepped-up basis, capital gains, and inheritance tax considerations ## Understanding Taxes on Inherited Property Inherited real estate receives favorable tax treatment compared to gifted or purchased property. The stepped-up basis rule reduces or eliminates capital gains taxes when heirs sell. However, several tax considerations affect decisions about what to do with inherited property. Tax laws change frequently. The information below covers general concepts. Consult a [tax professional](/service-categories/accountants-tax/overview) for advice specific to your situation. ## Stepped-Up Basis Cost basis determines how much capital gains tax is owed when property is sold. For purchased property, basis equals the purchase price plus improvements. For inherited property, basis "steps up" to fair market value at the date of death. **Example:** | Scenario | Original Owner | Heir (with stepped-up basis) | | -------------------------- | -------------- | ---------------------------- | | Purchase price | \$150,000 | N/A | | Fair market value at death | \$400,000 | \$400,000 (new basis) | | Sale price | N/A | \$425,000 | | Taxable gain | N/A | \$25,000 | Without stepped-up basis, the heir would owe capital gains on \$275,000 (\$425,000 - \$150,000). With stepped-up basis, the taxable gain is only \$25,000. The stepped-up basis applies regardless of what the original owner paid or how long they owned the property. Only appreciation after the date of death is taxable. ## Establishing Fair Market Value An [appraisal](/service-categories/appraisers/overview) at or near the date of death documents the stepped-up basis. This valuation protects heirs if the IRS questions the basis claimed on a future sale. **Documentation to obtain:** * Professional appraisal dated close to the date of death * Comparable sales data from that time period * Estate tax return (Form 706) if one was filed, which includes property valuations Without documentation, heirs may struggle to prove their basis years later when they sell. Get an appraisal even if you plan to keep the property. ## Capital Gains When Selling If the property sells for more than the stepped-up basis, the difference is a capital gain. The tax rate depends on how long the heir owned the property and their income level. **Holding period:** * Property held one year or less after inheritance: short-term capital gains (taxed as ordinary income) * Property held more than one year: long-term capital gains (lower tax rates) **Long-term capital gains rates (2024):** | Tax Filing Status | 0% Rate | 15% Rate | 20% Rate | | ---------------------- | -------------- | -------------------- | -------------- | | Single | Up to \$47,025 | \$47,026 - \$518,900 | Over \$518,900 | | Married Filing Jointly | Up to \$94,050 | \$94,051 - \$583,750 | Over \$583,750 | These thresholds apply to taxable income, not the gain itself. High-income taxpayers may also owe the 3.8% Net Investment Income Tax on capital gains. ## Estate and Inheritance Taxes Estate taxes and inheritance taxes are different from capital gains taxes. They apply to the transfer of assets at death, not to a later sale. The federal estate tax applies only to estates exceeding the exemption amount. For 2024, the exemption is \$13.61 million per individual. Estates below this threshold owe no federal estate tax. The exemption amount adjusts annually for inflation and is scheduled to decrease significantly in 2026. Some states impose their own estate taxes with lower exemption thresholds than the federal level. Exemptions range from around \$1 million to matching the federal amount, depending on the state. A few states tax beneficiaries who receive inherited assets. The tax rate often depends on the beneficiary's relationship to the deceased. Spouses are typically exempt, while distant relatives or non-relatives pay higher rates. **States with inheritance taxes (as of 2024):** Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania **States with estate taxes (as of 2024):** Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington, District of Columbia Maryland is the only state with both an estate tax and an inheritance tax. ## Tax Implications by Decision The tax consequences differ based on what heirs do with the property. Capital gains tax applies to appreciation above the stepped-up basis. Selling soon after inheritance typically results in minimal gain. Waiting allows more appreciation to accumulate, increasing potential tax liability. Selling costs (agent commissions, closing costs) add to the basis, reducing taxable gain. No immediate tax consequences. If later sold as a primary residence after living there at least two of the previous five years, heirs may exclude up to \$250,000 (single) or \$500,000 (married filing jointly) of capital gains under the [primary residence exclusion](/service-categories/accountants-tax/tax-implications-selling). [Rental income](/service-categories/accountants-tax/rental-property-taxes) is taxable. Heirs can deduct operating expenses, property taxes, insurance, and depreciation. Depreciation reduces taxable income but also reduces basis, increasing capital gains when eventually sold. A [1031 exchange](/service-categories/accountants-tax/1031-exchanges) allows deferring capital gains by reinvesting sale proceeds into another investment property. ## Depreciation Considerations for Rentals If converting inherited property to a rental, depreciation deductions reduce taxable rental income each year. However, depreciation also reduces the property's basis. **How it works:** * Residential rental property depreciates over 27.5 years * Only the building value depreciates, not land * Depreciation is calculated from the stepped-up basis at inheritance **Depreciation recapture:** When the property is sold, previously claimed depreciation is "recaptured" and taxed at up to 25%, regardless of how long the property was held. *** ## Learn More Detailed guide on capital gains, exclusions, and timing strategies Income, deductions, and depreciation for investment properties Deferring capital gains through like-kind exchanges Types of tax professionals and when to hire them Understanding appraisals for stepped-up basis documentation Different appraisal types and when each is needed Finding tax professionals for inherited property situations Challenging property tax assessments after inheritance *** Framework for choosing between selling, keeping, or renting *** Consult a [CPA or tax attorney](/service-categories/accountants-tax/comparing-accountants) before making decisions about inherited property. The tax implications of selling, keeping, or renting vary based on your overall financial situation.