Capital gains tax on inherited property: the stepped-up basis rule

When you inherit an asset and later sell it, many people assume they'll owe tax on the entire increase in value since the original owner bought it — sometimes decades of growth. The good news: that's almost never how it works in the United States. A rule called the stepped-up basis resets the clock at death, and it can wipe out an enormous amount of taxable gain.

What "stepped-up basis" actually means

Your cost basis is normally what you paid for an asset. When you sell, your taxable gain is the sale price minus that basis. But inherited assets get special treatment: instead of using what the deceased originally paid, your basis is reset to the fair market value on the date of death.

That reset is the "step-up." All of the appreciation that happened while the previous owner was alive is, for tax purposes, simply erased. You start fresh, as if you had bought the asset on the day they died for whatever it was worth that day.

Stepped-up basis = fair market value of the asset on the date of death.

Imagine a grandparent who bought a home in 1980 for $60,000. By the time they pass away it's worth $400,000. If they had sold it themselves the year before they died, they'd face a gain of $340,000. But because you inherited it, your basis steps up to $400,000 — and that $340,000 of lifetime appreciation never gets taxed at all.

How to figure your gain when you sell inherited property

The formula is the same one you'd use for any asset, but with the stepped-up number plugged in as your basis:

Sale price − stepped-up basis − selling costs = capital gain (or loss)

"Selling costs" includes real-estate agent commissions, title and closing fees, and certain legal or appraisal costs tied to the sale. For inherited stock or funds, it's brokerage commissions. Those costs come straight off your gain, so keep the paperwork.

Because the basis was just reset to the date-of-death value, the only thing that can be taxed is appreciation that happens after the death — between the day you inherited and the day you sell. If you sell quickly, that window is short and the gain is usually tiny or zero. If you hold for years, the property may keep climbing, and that post-death growth is what becomes taxable.

Inherited assets are always long-term

Here's a detail that surprises people: gains on inherited property are automatically treated as long-term, regardless of how long you actually held the asset. Normally you have to own something for more than a year to qualify for the lower long-term capital gains rates (0%, 15% or 20%). With an inheritance, the holding period is deemed long-term from day one. Even if you sell the day after you inherit, you get the preferential long-term rate — never the higher short-term ordinary-income rate.

Worked example: original cost vs stepped-up basis

Numbers make the rule obvious. Below, the same inherited house is sold at different times. Notice how little tax the step-up leaves behind compared with what the original owner would have faced.

Figure	If original owner sold	Heir sells right away	Heir sells 3 years later
Original purchase price (1980)	$60,000	$60,000	$60,000
Value at date of death	—	$400,000	$400,000
Cost basis used	$60,000	$400,000 (stepped up)	$400,000 (stepped up)
Sale price	$400,000	$405,000	$460,000
Selling costs (~6%)	$24,000	$24,300	$27,600
Taxable gain	$316,000	$0 (small loss)	$32,400

Illustrative figures only; ignores depreciation recapture, state tax and the home-sale exclusion. Your actual result depends on the appraised date-of-death value, your income and the current brackets.

Look at the difference. The original owner would have owed long-term capital gains tax on a $316,000 gain. The heir who sells right away owes essentially nothing — and may even book a small loss after selling costs. Even the heir who waits three years only pays tax on the modest post-death appreciation of about $32,400, not the lifetime gain.

Inherited stock works the same way

The step-up isn't just for real estate. Inherited shares, ETFs and mutual funds also reset to their value on the date of death. If your aunt bought a stock at $5 a share and it was worth $90 on the day she died, your basis is $90. Sell at $92 and your taxable gain is just $2 per share — not $87. Brokerages will usually re-cost the lots for you, but always confirm the date-of-death value they used.

Sell now or hold? The trade-off

Because the basis resets at death, selling soon after you inherit is the lowest-tax moment you'll ever have — the value usually hasn't moved, so the gain is near zero. That's why many heirs who don't want to keep a property simply sell it within the first year.

Holding has its own logic: the asset may keep appreciating, generate rent or dividends, or carry sentimental value. Just know that any growth after the date of death is taxable when you eventually sell, and a property used as a rental brings depreciation recapture into the picture. If you move into an inherited home and make it your primary residence for at least two years, you may later qualify for the home-sale exclusion on top of the step-up.

Estate tax vs capital gains tax — don't confuse them

This trips up almost everyone. They are two separate taxes that hit at different moments and for different reasons.

• Estate tax is paid by the deceased person's estate before anything is distributed, based on the total value of everything they owned. Only very large estates — those above the high federal exemption — owe any federal estate tax at all, so the vast majority of families never encounter it. A handful of states levy their own estate or inheritance tax with lower thresholds.
• Capital gains tax is paid by you, the heir, and only if you sell the inherited asset for more than its stepped-up basis. No sale, no capital gains tax.

In short: estate tax (if it applies at all) is settled by the estate up front; capital gains tax is your concern only later, and only on post-death growth. Most ordinary inheritances trigger neither in any meaningful amount.

	Estate tax	Capital gains tax
Who pays	The estate of the deceased	The heir who sells
When	Before assets are distributed	When you sell the asset
Based on	Total value of the estate	Sale price minus stepped-up basis
Who it affects	Only very large estates	Anyone who sells for a gain

Practical steps for heirs

• Get a date-of-death appraisal. A documented fair market value at death is your basis — and your proof if the IRS ever asks. For real estate, a formal appraisal is worth the cost; for stock, the closing price on the date of death usually does the job.
• Keep records of selling costs. Commissions, closing fees and qualifying improvements all reduce the gain.
• Check your state. A few states tax inheritances or capital gains differently, and the federal step-up doesn't always carry over identically.
• Mind community-property states. A surviving spouse may get a "double step-up" on jointly owned assets — a meaningful benefit worth asking a CPA about.

Frequently asked questions

Do I pay capital gains tax on inherited property?

Usually very little, often nothing. The stepped-up basis resets your cost to the date-of-death value, so only appreciation after the death is taxable. Sell soon after inheriting and the gain is typically small or zero.

What is stepped-up basis on inherited property?

It means your cost basis is reset to the asset's fair market value on the date the original owner died — not what they paid. Decades of pre-death appreciation are effectively wiped out for tax purposes.

How do I calculate gain on inherited property I sold?

Sale price minus the stepped-up basis (date-of-death value) minus selling costs equals your capital gain. Sell quickly and the value usually hasn't moved much, so the gain is small.

Is the sale of inherited property long-term or short-term?

Always long-term, no matter how briefly you held it. Inherited gains automatically qualify for the lower 0/15/20% long-term rates, even if you sell the day after you inherit.

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

Estate tax is paid by the deceased's estate on the total estate value, and only very large estates owe it. Capital gains tax is paid by you only when you sell an inherited asset for more than its stepped-up basis.