Inheriting real estate can bring both opportunity and responsibility. One of the first financial questions most heirs ask is how much is capital gains tax on inherited property and whether a large tax bill will follow the sale. Under current U.S. tax law in 2026, the answer depends on the property’s value at the time of inheritance, how long you hold it, and how much it increases in value before you sell.
This guide explains, in clear and practical terms, how capital gains tax on inherited property works today, how much you may owe, and what factors can reduce or eliminate your tax burden.
What Is Capital Gains Tax?
Capital gains tax is the tax you pay on the profit made from selling an asset such as a house, land, or investment property. The tax is not triggered when you inherit property. It applies only when you sell it for more than its tax basis.
The key concept for inherited property is the stepped-up basis, which often results in little or no capital gains tax for heirs who sell soon after inheriting.
The Step-Up in Basis Rule Explained
When someone inherits property, the IRS resets the tax basis to the property’s fair market value on the date of the original owner’s death.
This means:
- The original purchase price no longer matters.
- The new basis becomes the value at the time of inheritance.
- Capital gains are calculated only on appreciation after that date.
Simple Example
- Original owner bought the home for: $80,000
- Home value at time of death: $500,000
- Your new tax basis: $500,000
- You sell the home for: $505,000
Taxable gain: $5,000
You are taxed only on the $5,000 increase, not on the entire $425,000 rise that happened during the previous owner’s lifetime.
If you sell the property at or near the inherited value, your capital gains tax may be zero.
Federal Capital Gains Tax Rates in 2026
Inherited property is generally treated as long-term, even if you sell shortly after inheriting. That means long-term capital gains tax rates apply:
- 0% for lower-income taxpayers
- 15% for most middle-income taxpayers
- 20% for high-income taxpayers
In some cases, an additional 3.8% Net Investment Income Tax may apply to higher earners, increasing the effective rate.
How Long You Hold the Property Matters
Although inherited assets usually receive long-term treatment, your holding period can still affect planning:
- Selling quickly often minimizes taxes because appreciation is limited.
- Holding longer may increase value, which also increases taxable gain.
- Using the property as your primary residence may unlock major exclusions.
Using the Primary Residence Exclusion
If you move into the inherited home and live there for at least two of the five years before selling, you may qualify for the home sale exclusion:
- Up to $250,000 of gain excluded for single filers
- Up to $500,000 of gain excluded for married couples filing jointly
This can eliminate capital gains tax entirely for many heirs, even if the home increases significantly in value after inheritance.
Calculating Your Capital Gains Step by Step
To determine how much tax you may owe:
- Start with the fair market value at the time of inheritance (your stepped-up basis).
- Add the cost of qualified improvements you made.
- Subtract selling expenses such as agent commissions and legal fees.
- Subtract the total from your final sale price.
The result is your taxable capital gain.
What About State Taxes?
While federal rules apply nationwide, some states also tax capital gains or treat them as ordinary income. Rates and exemptions vary widely by state. Some states have no income tax at all, while others apply full state income tax rates to capital gains.
Special Situations That Can Affect Taxes
Inherited Rental or Investment Property
Rental income earned after inheritance is taxable, and depreciation may affect your future capital gains calculation when you sell.
Property Held in a Trust
The step-up in basis usually applies, but trust structure and timing can influence how and when taxes are calculated.
Multiple Heirs
When several heirs inherit the same property, each person’s gain is calculated based on their share of the stepped-up value and their portion of the sale proceeds.
Common Misunderstandings
“I pay tax on the full value of the home.”
No. You pay tax only on the increase in value after the date of inheritance.
“Inheriting automatically triggers capital gains tax.”
No. Taxes are due only if and when you sell at a profit.
“Estate tax and capital gains tax are the same.”
No. Estate tax applies to large estates before assets are distributed. Capital gains tax applies later if the heir sells at a gain.
Smart Planning Tips for Heirs
- Obtain a professional appraisal at the time of inheritance.
- Keep records of all improvements and selling costs.
- Evaluate whether living in the home could qualify you for the residence exclusion.
- Consider timing the sale during a lower-income year if possible.
- Work with a tax professional for large or complex estates.
Final Word on How Much Is Capital Gains Tax on Inherited Property
In most cases, heirs pay far less tax than expected thanks to the stepped-up basis rule. Many people owe little or nothing if they sell soon after inheriting. Others can reduce or eliminate tax using the primary residence exclusion or by carefully tracking costs and timing the sale.
Understanding the rules before listing the property can make a significant difference in how much money stays in your pocket.
Have you inherited property or are you planning to? Share your thoughts and stay connected for more clear, practical tax guidance.