Capital Gains Tax on Inherited Property: Complete 2025 Guide

When you inherit property — a house, a brokerage account, raw land — one of the first questions that surfaces is whether you owe capital gains tax on it. The short answer is: most heirs pay little or no capital gains tax, thanks to a powerful rule called the step-up in basis. Under this rule, your cost basis in an inherited asset is reset to its fair market value on the date of the original owner's death. Decades of appreciation built up during the deceased's lifetime simply disappear for tax purposes. That said, the details matter. If you hold inherited property for years before selling, or if you inherit certain retirement accounts, the rules shift significantly. This guide walks through exactly how capital gains tax on inherited property works in 2025, what rates apply, which situations create a real tax bill, and five proven strategies to keep your tax liability as low as legally possible.

How the Step-Up in Basis Works for Inherited Property

The step-up in basis (sometimes called stepped-up basis) is the cornerstone rule governing capital gains tax for heirs. Normally, when you sell an asset, your taxable gain is the difference between the sale price and your original cost basis — what you paid for it, plus improvements. Inherited property works differently: instead of inheriting the deceased's original purchase price, you inherit a new basis equal to the asset's fair market value on the date of death.

Here is a worked example that illustrates the benefit clearly. Suppose your parent purchased a home in 1990 for $100,000. Over the following decades the property appreciates, and by the time they pass away the home is worth $500,000. Under the step-up rule, your cost basis in that property is immediately reset to $500,000 — the value at death — regardless of what your parent originally paid. If you sell the home the following year for $520,000, your taxable gain is only $20,000 (the difference between your $500,000 basis and the $520,000 sale price). The original $400,000 of appreciation that accrued over thirty years is completely excluded from taxation. Without the step-up rule you would have faced tax on the entire $420,000 gain.

This rule applies to most inherited assets: real estate, stocks, mutual funds, business interests, and collectibles. The primary exceptions are assets held inside retirement accounts such as traditional IRAs and 401(k)s, which follow entirely different rules (covered below).

What Is Fair Market Value at Date of Death?

Because the stepped-up basis equals fair market value (FMV) at the date of death, establishing that FMV accurately is critically important — it determines how much gain is wiped clean. For real estate, FMV is typically supported by a certified appraisal conducted close to the date of death. For publicly traded stocks and mutual funds, the IRS uses the average of the high and low trading prices on the date of death. For closely held businesses or unique assets, a professional appraisal from a qualified appraiser is normally required.

Estates can also use an alternate valuation date — six months after death — instead of the actual date of death, but only if the estate is large enough to owe federal estate tax and the alternate date results in a lower overall estate value and lower estate tax. This election is rarely available to most families because it requires an estate tax liability in the first place.

If no appraisal was ordered at the time of death, you may still be able to reconstruct FMV through comparable sales data, historical tax assessments, or retrospective appraisals. Document everything carefully. The IRS may challenge a basis that seems unexpectedly high.

Capital Gains Tax Rates for Inherited Property (2025)

One of the most favorable features of inherited property is that long-term capital gains rates always apply, regardless of how long you personally held the asset after inheriting it. Even if you sell an inherited house one week after inheriting it, the gain is taxed at long-term rates — not the higher short-term rates that would ordinarily apply to assets held less than a year. This is because the tax code treats inherited property as automatically held long-term.

For 2025, the federal long-term capital gains rates are:

High-income taxpayers may also owe an additional 3.8% Net Investment Income Tax (NIIT) on top of the capital gains rate. This surcharge applies to the lesser of net investment income or the amount by which modified adjusted gross income (MAGI) exceeds $200,000 for single filers or $250,000 for married couples filing jointly. Capital gains from selling inherited property count as net investment income for this purpose.

State capital gains taxes are a separate layer. Most states tax capital gains at ordinary income rates, and those rates vary widely — from zero in states with no income tax to over 13% in California. Always account for state tax when projecting your total bill.

Capital Gains Tax on Inherited Real Estate: House, Rental, Land

Real estate is the most common inherited asset that heirs eventually sell, and the step-up rule is particularly powerful here because real property tends to appreciate significantly over long holding periods. For a primary residence that you inherit and then move into for at least two years out of the five years before selling, you may also qualify for the Section 121 exclusion — up to $250,000 of gain ($500,000 for married couples) excluded from tax. However, this exclusion applies to gains above your stepped-up basis, and since that basis is already reset to date-of-death value, the exclusion only matters if you hold the home long enough for further appreciation to build up.

Inherited rental property is a more complex case. In addition to capital gains tax when you eventually sell, you must also recapture accumulated depreciation at a 25% rate. If the previous owner took depreciation deductions on the rental over many years, that depreciation is not wiped out by the step-up in basis. When you sell, the portion of the gain attributable to prior depreciation is recaptured and taxed at up to 25% federally, which can meaningfully increase your tax bill compared to selling a non-rental property.

Raw land follows the straightforward step-up rule: your basis is FMV at death, and any subsequent appreciation is taxed as long-term capital gain when sold. There is no depreciation recapture issue because land is not depreciable. If you receive farmland or rural acreage, the date-of-death appraisal is especially important because rural property values can be highly variable and difficult to establish retroactively.

Capital Gains Tax on Inherited Stocks and Investments

Inherited brokerage accounts and individual stocks receive the same step-up in basis as real estate. The basis for each security is reset to its closing price (or the average of high and low for the day) on the date of death. This means a portfolio that the deceased built over decades, holding appreciated shares with very low original cost, passes to heirs with a dramatically higher basis — essentially erasing the embedded capital gains that would have been owed had the original owner sold during their lifetime.

There is an important practical step: instruct the brokerage to update the cost basis records as soon as you establish yourself as the beneficiary. Most major brokerages will do this automatically once you provide a death certificate and complete their inheritance paperwork, but it is worth confirming in writing. If the brokerage later reports the wrong basis, the resulting tax forms can be difficult to unwind.

Mutual funds and ETFs work the same way. For bonds inherited at a premium or discount to par value, the rules are somewhat more nuanced — the step-up applies to the market value, but accretion of discount or amortization of premium may still be required. Consult a tax advisor for bond-heavy portfolios.

One special case: if the deceased had unrealized losses in their portfolio — securities worth less than what they paid — the step-down in basis rule applies. The basis is reduced to the lower fair market value at death. Those losses cannot be used by the heir for tax purposes; they simply disappear.

Inherited Property in Community Property States

Nine US states follow community property law: California, Texas, Arizona, Nevada, Washington, Idaho, Louisiana, New Mexico, and Wisconsin. In these states, married couples generally own their marital assets jointly as community property, with each spouse holding a 50% interest. When one spouse dies, a remarkable tax benefit can apply: the double step-up in basis.

In a community property state, both halves of a community asset may receive a stepped-up basis at the first spouse's death — not just the deceased spouse's half. This is significantly more favorable than the rules in common law (non-community property) states, where only the deceased's 50% interest is stepped up. For the surviving spouse, this means the entire property's basis is reset to current fair market value, making a future sale far more tax-efficient.

For example, suppose a married couple in California bought a home together for $200,000, and it is worth $900,000 when one spouse dies. In a common law state, only the deceased's 50% share ($450,000) gets stepped up; the surviving spouse retains their original $100,000 basis on their half, giving a blended basis of $550,000. In California, under community property rules, the entire property may receive a step-up to $900,000 — saving tax on an additional $350,000 of gains if the surviving spouse later sells. This difference can amount to tens of thousands of dollars in avoided taxes.

When You Do Owe Capital Gains Tax on Inherited Property

The step-up in basis is powerful but not a permanent shield. Capital gains tax becomes real in several scenarios:

Selling years after inheriting: If you inherit property and hold it for several years before selling, any appreciation that occurs during your period of ownership — above the stepped-up basis — is taxable. For example, using our earlier scenario, if you inherited the home with a $500,000 basis and sell five years later for $650,000, you owe capital gains tax on $150,000. The original $400,000 pre-death gain is still excluded, but the new $150,000 gain is not.

Selling immediately at FMV: In the ideal case, if you sell the property at or very close to its fair market value on the date of death, your gain is approximately zero and your tax bill is near nothing. This is why estates that need to be liquidated quickly often face minimal capital gains exposure.

Depreciation recapture on rental property: As noted above, prior depreciation deductions are not wiped by the step-up. This can create a 25% federal tax on the recaptured portion even when total gain is modest.

Inherited property used in a business: If the deceased used property in a business, there may be Section 1245 recapture (for personal property) or Section 1250 recapture (for real property), potentially at ordinary income rates, in addition to standard capital gains tax.

5 Strategies to Minimize Capital Gains Tax on Inherited Property

1. Sell promptly near date-of-death value. If heirs want to liquidate quickly, selling close to the date of death typically means selling near the stepped-up basis, resulting in minimal gain. Delaying increases the risk that the property appreciates further above basis before you sell.

2. Get an accurate appraisal as soon as possible. A qualified appraisal that properly establishes a high FMV at date of death locks in the highest possible basis. Do not skip or shortcut the appraisal, especially for real estate or business interests. A higher documented basis means less taxable gain whenever you sell.

3. Move into the inherited home and claim the primary residence exclusion. If you live in an inherited house as your primary residence for at least two of the five years before selling, you can exclude up to $250,000 ($500,000 if married) of gain above your stepped-up basis under Section 121. This requires you to actually reside there, not just own it.

4. Harvest losses to offset inherited property gains. If your overall investment portfolio has unrealized losses in other positions, consider selling those positions in the same tax year you sell inherited property. Capital losses offset capital gains dollar for dollar, reducing your net taxable gain. This is a standard tax-loss harvesting strategy that works especially well when liquidating a mixed inherited portfolio.

5. Spread sales across multiple tax years. If you have inherited multiple properties or a large appreciated portfolio, staggering sales across different calendar years can keep your income in a lower capital gains bracket each year. Selling everything at once may push you into the 20% bracket or trigger the NIIT, whereas spreading sales may keep each year's income below the 15% threshold.

Inherited IRA: Different Rules Apply

Retirement accounts — traditional IRAs, 401(k)s, 403(b)s, and similar pre-tax accounts — are the major exception to the step-up in basis rule. These accounts do not receive a stepped-up basis. Withdrawals from an inherited traditional IRA or 401(k) are taxed as ordinary income (at your marginal income tax rate, not the lower capital gains rates) in the year you take the distribution. This can result in a significantly higher tax bill than selling inherited real estate or stocks.

Under the SECURE Act 2.0, most non-spouse beneficiaries who inherited a retirement account after January 1, 2020 are subject to the 10-year rule: the entire account must be fully distributed within 10 years of the original owner's death. There are no required annual distributions within those 10 years for most beneficiaries, but the account cannot simply remain indefinitely. Surviving spouses, minor children of the deceased, individuals no more than 10 years younger than the deceased, and chronically ill or disabled individuals qualify as "eligible designated beneficiaries" and can stretch distributions over their own life expectancy instead.

Inherited Roth IRAs follow the same 10-year distribution rule for most non-spouse beneficiaries, but qualified distributions from Roth accounts are generally tax-free — the original contributions were made with after-tax dollars. This makes Roth accounts a significantly more tax-efficient asset to inherit than traditional pre-tax accounts.

Given the complexity of inherited retirement accounts, and the significant income-tax consequences of distributions, consulting a tax advisor before taking any distributions from an inherited IRA or 401(k) is strongly recommended.