Own Luxury Homes®
Capital Gains Tax on an Inherited Home Sale
Taxable gain = sale price − stepped-up basis − selling costs (8–10%). Selling at date-of-death value often = zero taxable gain. Always long-term (0/15/20%). IRMAA risk if gain pushes MAGI above $109K/$218K (2-year Medicare surcharge). 6 states: inheritance tax. 12 states+DC: estate tax (OR $1M exemption). Own Luxury Homes® 12-Point Agent Integrity Audit™ — full federal+state calculation before advising.
Capital Gains Tax on an Inherited Home Sale: What You Actually Owe
Capital gains tax on an inherited home is frequently overestimated by heirs who assume they owe taxes on the full value of what they received. The stepped-up basis eliminates all the appreciation that occurred during the deceased’s lifetime. What remains taxable is only the appreciation above the FMV at death — usually a small amount if sold reasonably promptly. This page walks through the complete federal and state tax picture so you know exactly what you actually owe before you sell.
The Federal Capital Gains Calculation: Step by Step
| Step | Line Item | Example | |||||||
|---|---|---|---|---|---|---|---|---|---|
| 1 | Sale price | $680,000 | |||||||
| 2 | Less: stepped-up basis (FMV at date of death) | −$650,000 | |||||||
| 3 | Less: selling costs (commissions, transfer taxes, title) | −$54,400 (8% of $680K) | |||||||
| 4 | Gross gain above stepped-up basis | −$24,400 (a LOSS in this example — no tax) | |||||||
| OR if sold higher: | |||||||||
| 1 | Sale price | $750,000 | |||||||
| 2 | Less: stepped-up basis | −$650,000 | |||||||
| 3 | Less: selling costs | −$60,000 (8% of $750K) | |||||||
| 4 | Net taxable gain | $40,000 | |||||||
| 5 | Federal long-term rate (15%) | $6,000 | |||||||
| Selling costs (commissions, transfer taxes, title fees) reduce the taxable gain dollar-for-dollar. This is why selling shortly after inheriting often produces zero or minimal federal capital gains tax even when the property has appreciated significantly since the date of death. | |||||||||
Federal Long-Term Capital Gains Rates for 2026
| Filing Status | 0% Rate | 15% Rate | 20% Rate | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Single | Up to ~$47,025 | $47,026–$518,900 | Above $518,900 | ||||||
| Married filing jointly | Up to ~$94,050 | $94,051–$583,750 | Above $583,750 | ||||||
| Head of household | Up to ~$63,000 | $63,001–$551,350 | Above $551,350 | ||||||
| Approximate 2026 thresholds; confirm current rates with a CPA. The 3.8% Net Investment Income Tax (NIIT) also applies to capital gains for higher-income filers (above $200K single / $250K joint). For most middle-income heirs, the applicable rate is 15%. | |||||||||
The IRMAA Risk: When a Large Inherited Home Sale Spikes Medicare Costs
An inherited home sale that generates significant capital gains above the stepped-up basis can push your Modified Adjusted Gross Income (MAGI) above the Medicare IRMAA threshold — triggering Medicare surcharges for two years after the sale. 2026 IRMAA threshold: $109,000 single / $218,000 joint. If you or your surviving spouse is on Medicare, coordinate the sale year with a CPA to minimize IRMAA exposure. See the IRMAA guide in the retirement silo for the full bracket table.
State-Level Inheritance and Estate Taxes
State taxes are separate from federal capital gains and can apply regardless of gain:
| Tax Type | Who Pays It | States That Have It | 2026 Notes | ||||||
|---|---|---|---|---|---|---|---|---|---|
| State inheritance tax | The heir (recipient), not the estate | Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania | Rate and exemption varies by state and relationship to deceased; immediate family often exempt | ||||||
| State estate tax | The estate, before distribution | 12 states + DC; exemptions range from $1M (OR) to $7M (CT) | Oregon $1M, Massachusetts $2M, Illinois $4M, Hawaii $5.49M, Maryland $5M | ||||||
| State capital gains tax | The selling heir | Most states with income tax also tax capital gains | California taxes capital gains as ordinary income (up to 13.3%); no exclusion for long-term | ||||||
| California heirs selling an inherited home face state capital gains tax as ordinary income, even though the federal gain (above stepped-up basis) may be small. On a $40,000 federal gain with a 13.3% California rate, state tax = $5,320. Always calculate total federal + state tax, not just federal. | |||||||||
The Primary Residence Exclusion: If You Move In
If an heir moves into the inherited home and uses it as their primary residence for at least 2 of the 5 years before selling, the standard primary residence exclusion applies: $250,000 (single) or $500,000 (married filing jointly) of gain above the stepped-up basis is excluded from federal capital gains. This provides an additional layer of tax protection for heirs who can use the property for at least two years.
“The most important thing I tell heirs about capital gains is to run the actual number before assuming they have a big tax bill. Most of them are expecting to pay taxes on the full value of the home — $650,000 received, must be a huge tax. When I walk through the calculation — stepped-up basis at $650K, sale at $680K, selling costs of $54K — the taxable gain is zero or negative. The stepped-up basis is extraordinarily powerful. The tax anxiety usually dissolves once the actual math is on paper.”
— Ryan Brown, Principal Broker & CEO, Own Luxury Homes®
How much capital gains tax do you pay on an inherited house?
Usually very little or nothing. The stepped-up basis resets to FMV at death. Selling costs (8–10%) further reduce the taxable gain. If you sell at or near the date-of-death value, the taxable gain is minimal. Any gain is taxed at long-term rates (0%, 15%, or 20%) based on your total income. For most middle-income heirs: 15% on the net gain above the stepped-up basis minus selling costs.
Do you have to pay capital gains on an inherited house?
Only if the sale price exceeds the stepped-up basis plus selling costs. If you sell soon after inheriting at approximately the date-of-death value, the taxable gain is often zero. Even if there is a gain, it is always taxed at long-term rates (never short-term), and may be zero-rated for lower-income heirs.
How does the primary residence exclusion apply to inherited homes?
If you move in and live there 2 of 5 years before selling, you can exclude $250,000 (single) or $500,000 (married) of capital gains above the stepped-up basis from federal tax. You do not need to have owned the home before inheriting it — the clock starts on your ownership and use when you move in.
Are there state taxes on an inherited home sale?
Potentially yes, separate from federal capital gains: inheritance tax (paid by the heir in 6 states), state estate tax (paid by the estate in 12 states), and state capital gains or income tax on any gain. California taxes capital gains as ordinary income up to 13.3% — even on a small gain above the stepped-up basis. Always calculate federal + state together.
Own Luxury Homes® — estate property specialists who run the full capital gains calculation before advising on any inherited home sale. 12-Point Agent Integrity Audit™. Talk to an estate property specialist ›
"The introduction Own Luxury Homes® makes is to a specialist with documented closing history in your specific market — not the county, not the metro, the submarket you're actually selling or buying in. That's the standard we verify before your name goes anywhere."
— Ryan Brown, Principal Broker & CEO, Own Luxury Homes® (FL License BK3626873)