Important disclaimer: This article is for general educational purposes only and does not constitute tax or legal advice. Tax laws change and individual situations vary. Always consult a qualified CPA or tax attorney before making decisions about selling inherited property.
1. What Is Capital Gains Tax?
Capital gains tax is the federal (and sometimes state) tax on the profit you make when you sell an asset for more than you paid for it. The taxable gain is calculated as:
Sale Price − Cost Basis − Selling Costs = Taxable Gain
The cost basis is typically what you originally paid for the property. For most assets you buy yourself, this is straightforward. Inherited property is different — and the difference is almost always in your favor.
2. The Stepped-Up Basis: The Rule That Changes Everything
When you inherit property, you don't inherit the original owner's cost basis. Instead, your cost basis is "stepped up" to the fair market value of the property on the date of the decedent's death. This is one of the most significant tax provisions for inherited real estate.
Without the step-up, selling that same house for $315,000 would have generated a taxable gain of $270,000 — potentially a tax bill of $40,000 or more. The stepped-up basis effectively wipes out decades of appreciation that accrued during the original owner's lifetime.
3. When Will You Owe Capital Gains on an Inherited Property?
You'll owe capital gains tax only if you sell the property for more than the stepped-up basis — the fair market value at the date of death. This typically happens in two situations:
The property appreciates significantly after you inherit it
If the home was worth $300,000 when you inherited it and you sell two years later for $370,000, your gain is $70,000. That $70,000 is taxable — but because you held the property for more than 12 months, it qualifies for the lower long-term capital gains rate.
The estate valuation was lower than the actual sale price
In some cases the estate may have used an appraised value that was lower than the actual selling price — either because the appraisal was conservative or the market moved between the date of death and closing. If your sale price exceeds the stepped-up basis, the difference is taxable.
Timing matters: Short-term vs. long-term rates. If you sell an inherited property within 12 months of the date of death, your gain may be taxed at ordinary income rates (up to 37%). Hold for more than 12 months and the gain qualifies for long-term capital gains rates — 0%, 15%, or 20% depending on your income. For most heirs, the long-term rate applies automatically since most probate processes take longer than 12 months.
4. Federal Long-Term Capital Gains Tax Rates (2024)
| 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 |
| Head of Household | Up to $63,000 | $63,001 – $551,350 | Over $551,350 |
Many heirs who sell at or near the stepped-up value will have little to no taxable gain — and even if there is a gain, the 15% long-term rate applies for most middle-income households.
5. Texas Has No State Capital Gains Tax
Texas does not have a state income tax, which means Texas has no state capital gains tax. Whatever you owe goes to the federal government only. For heirs in states like California (13.3% state rate) or New York (up to 10.9%), this distinction is enormous. For Texas heirs, it's one less variable to worry about.
Texas also does not impose a state inheritance tax or a state estate tax. At the federal level, the estate tax exemption for 2024 is $13.61 million per individual. The vast majority of estates fall well below this threshold and owe no federal estate tax whatsoever.
⚠️ 2025 Sunset Provision: The elevated federal estate tax exemption under the Tax Cuts and Jobs Act is scheduled to sunset at the end of 2025, potentially dropping to approximately $7 million per individual. If the estate you're dealing with is large, consult an estate planning attorney about timing and planning strategies.
6. How to Establish the Stepped-Up Basis
The IRS requires you to establish the fair market value of inherited property as of the date of death. Here's how that's typically done:
- Formal appraisal: A licensed real estate appraiser prepares a retroactive appraisal as of the date of death. This is the most defensible documentation for the IRS.
- Comparative market analysis: A licensed agent's CMA can serve as supporting documentation, though it carries less weight than a formal appraisal.
- Tax assessment records: County appraisal district records from around the date of death provide supporting data, though they're not always accurate reflections of market value.
- Estate tax return: If the estate filed a federal estate tax return (Form 706), the values reported there typically establish the stepped-up basis.
7. Special Situations That Affect Basis
Community property (Texas)
Texas is a community property state. When a spouse dies, the surviving spouse receives a full step-up on the entire community property — not just the deceased spouse's half. This is a significant benefit unique to community property states and can substantially reduce or eliminate capital gains for surviving spouses who later sell.
Joint tenancy with right of survivorship
Property held in joint tenancy (not community property) only receives a step-up on the deceased owner's share. If the property was held 50/50, only half the basis is stepped up. The surviving owner's original basis on their half remains unchanged.
Inherited property you later convert to a rental
If you inherit a property, rent it out for several years, and then sell it, the tax treatment becomes more complex. The stepped-up basis is established at the date of death, but any depreciation you claimed during the rental period reduces your basis. Consult a CPA if this applies to your situation.
8. Selling Costs Reduce Your Taxable Gain
Even if your sale price exceeds your stepped-up basis, several selling costs can be deducted from your gain:
- Real estate agent commissions
- Title insurance and closing fees
- Transfer taxes and recording fees
- Attorney fees related to the sale
- Capital improvements made to the property (not routine maintenance)
"I was convinced I was going to owe a huge tax bill. My mom bought the house for $60,000 in 1991. Once my CPA explained the stepped-up basis and showed me the actual numbers, I realized I owed almost nothing. We sold to a cash buyer and were done in three weeks."— Heir, Collin County, Texas
9. Frequently Asked Questions
Do I have to report the sale of an inherited property on my taxes?
Yes. You must report the sale on Schedule D of your federal tax return, even if you have no taxable gain. You'll report your basis (the stepped-up value), the sale price, and the resulting gain or loss.
What if the property sold for less than the stepped-up basis?
You have a capital loss. On inherited property, that loss is typically treated as a long-term capital loss, which can offset capital gains elsewhere in your portfolio. Up to $3,000 per year can be deducted against ordinary income, with unused losses carried forward.
Will I owe more if I sell quickly?
The step-up protects you from gains that accrued before the date of death — not after. If you sell quickly at or near the fair market value at death, there is typically little or no taxable gain. The risk of delaying is that the property appreciates further, creating a larger gain.
What if there are multiple heirs?
Each heir's capital gains calculation is based on their proportionate share of the stepped-up basis. If four siblings each inherit 25% of a property, each reports their 25% of the gain (or loss) on their individual tax returns.
Does Texas have an inheritance tax?
No. Texas has no state inheritance tax and no state estate tax. Heirs in Texas pay federal taxes only.
Do I need a formal appraisal?
For most estates not subject to federal estate tax, a formal appraisal is not legally required but is highly recommended as documentation for your tax return. If the estate exceeds the federal exemption, a qualified appraisal is typically required for the estate tax return.