Will You Owe Taxes on an Inherited Home? The "Stepped-Up Basis" Explained.

One of the most common and stressful questions I hear from heirs is, "Will we have to pay a huge amount in taxes when we sell the property?" The answer, thanks to a crucial tax rule, is often a pleasant surprise.

What is "Stepped-Up Basis"?

In a normal sale, capital gains tax is calculated on the profit—the difference between the original purchase price and the final sale price. If a home was bought for $50,000 and sold for $800,000, that’s a massive gain.

However, for inherited property, the IRS allows a "step-up in basis." This means the property's cost basis is reset to its fair market value on the date of the original owner's death.

What This Means for You

Let's say a home is professionally appraised to be worth $800,000 on the date the owner passed away. That $800,000 becomes the new starting point.

• If the estate sells the home a few months later for $810,000, the taxable capital gain is only $10,000.
• If the estate sells the home for its appraised value of $800,000, the taxable capital gain is $0.

This rule is a powerful tool that can save heirs tens or even hundreds of thousands of dollars in taxes.

Disclaimer: I am a real estate expert, not a tax advisor. This information is for educational purposes. You must consult with a qualified CPA to understand the specific tax implications for the estate.