Inherited property can be both a financial opportunity and a complex tax situation for American families. While the federal government does not tax you simply for receiving an inheritance, selling that property can create capital gains tax liability if its value has increased. Understanding how to avoid capital gains tax on inherited property is essential for protecting the value of what you receive and making informed financial decisions in 2026 and beyond.
This guide explains, in clear and practical terms, the legal methods available under current U.S. tax law to minimize or eliminate capital gains taxes when you inherit real estate.
How Capital Gains Tax Works on Inherited Property
When you inherit a house, land, or other real estate, the IRS does not treat the inheritance itself as taxable income. Taxes only become an issue when the property is sold and a profit is realized.
The most important concept to understand is the stepped-up basis. The tax basis of inherited property is generally adjusted to its fair market value on the date of the original owner’s death. This means your taxable gain is calculated using that updated value, not what the deceased originally paid for the property.
For example, if your parent bought a home decades ago for $80,000 and it was worth $500,000 at the time of death, your new tax basis becomes $500,000. If you sell it shortly after inheriting it for $505,000, your taxable gain is only $5,000 — not $425,000. In many cases, this rule alone can eliminate most or all capital gains tax.
Sell Soon After Inheriting
One of the simplest ways to minimize capital gains tax is to sell the inherited property relatively quickly.
Because the stepped-up basis reflects the market value at the time of death, any appreciation that occurs afterward is what becomes taxable. The shorter the time between inheritance and sale, the smaller the potential gain. In stable markets, heirs often find that the selling price is very close to the stepped-up value, resulting in little or no taxable profit.
Live in the Property and Use the Primary Residence Exclusion
If the inherited home is suitable for living, moving into it can unlock a powerful tax benefit.
Under federal law, if you use the home as your primary residence for at least two of the five years before selling, you may exclude:
- Up to $250,000 of capital gains if you are single
- Up to $500,000 if you are married filing jointly
This exclusion applies on top of the stepped-up basis. If the home increases significantly in value while you live there, the primary residence exclusion can wipe out a large portion — or all — of the taxable gain.
Rent the Property and Time the Sale Carefully
Some heirs choose to rent inherited property instead of selling immediately. While renting does not eliminate capital gains tax, it allows you to control when the gain is realized.
Capital gains tax rates depend on your total taxable income in the year of sale. By waiting to sell in a year when your income is lower, you may fall into a lower long-term capital gains bracket, reducing the percentage of tax owed.
Rental ownership also allows for depreciation deductions over time, which can help offset rental income and improve overall cash flow, though depreciation may affect future tax calculations when the property is sold.
Use Trust and Estate Planning Strategies
Trusts can play a role in long-term tax planning, especially for families with significant assets.
Certain trusts allow property to pass to heirs in a structured way that can help manage estate taxes and future capital gains exposure. However, trust rules are highly technical, and not all trusts receive the same stepped-up basis treatment. Proper structuring is essential to preserve tax benefits.
Trust-based planning is most effective when done with professional guidance and a long-term strategy that considers both income taxes and estate taxes.
Donate the Property to Charity
Charitable giving can completely eliminate capital gains tax on inherited real estate.
When you donate appreciated property directly to a qualified charity:
- You generally avoid paying capital gains tax on the appreciation.
- You may be eligible for a charitable deduction based on the property’s fair market value.
This approach is particularly useful for heirs who do not need the property’s sale proceeds and wish to support charitable causes while reducing their tax burden.
Hold the Property Until the Next Generation
Another long-term strategy is simply holding the inherited property for life and passing it on to your own heirs.
When property is transferred at death, it typically receives another stepped-up basis. This can erase capital gains that accrued during your ownership, allowing the next generation to start again with a new market-value basis. While this strategy requires patience and long-range planning, it can be an effective way to preserve family wealth.
Deduct Selling Costs and Offset Gains
When you sell inherited property, you can reduce your taxable gain by subtracting legitimate selling expenses, including:
- Real estate agent commissions
- Legal fees
- Title and escrow costs
- Certain improvement expenses made before the sale
You may also offset gains with capital losses from other investments sold in the same year, reducing or eliminating your overall capital gains tax liability.
Understand the Difference Between Estate Tax and Capital Gains Tax
Estate tax and capital gains tax are often confused, but they are separate issues.
The federal estate tax applies only to very large estates and does not affect most families. Capital gains tax, on the other hand, applies when inherited assets are sold for a profit. The stepped-up basis rule links these two systems by adjusting the asset’s value at death, which is why estate planning and capital gains planning often go hand in hand.
Putting It All Together
Avoiding unnecessary taxes begins with understanding your options. Learning how to avoid capital gains tax on inherited property allows you to make strategic choices that align with your financial goals, whether that means selling quickly, living in the home, renting it, donating it, or passing it on to future generations.
Each option carries different financial and tax consequences, but all operate within the framework of existing U.S. tax law. With thoughtful planning, many heirs can dramatically reduce — and sometimes eliminate — the capital gains tax associated with inherited real estate.
Stay informed, plan carefully, and join the conversation by sharing your thoughts or questions below as you navigate your inheritance decisions.