The stepped-up basis rule
Your starting point for tax is the house’s value when the owner died. Section 1014(a) of the Internal Revenue Code sets the basis of property acquired from a decedent at its fair market value on the date of death, unless the estate elects an alternate valuation date under section 2032. IRS Publication 551 restates it for heirs.
What the parent paid decades ago no longer matters. Here is a simple example with round numbers:
| Amount | |
|---|---|
| Parent’s purchase price in 1985 | $60,000 |
| Fair market value on the date of death | $180,000 (your basis) |
| Sale price a year later | $185,000 |
| Selling costs (closing, conveyance fee, commission if listed) | $12,000 |
| Gain or loss | $185,000 minus $12,000 minus $180,000 = a $7,000 loss, not a gain |
Without the step-up, the gain would have been measured from $60,000. The step-up is why most heirs who sell within a year or two owe little or nothing.
Gains on inherited property are always long-term
You don’t need to hold an inherited house for a year to get long-term rates. IRS Publication 544 says that if you inherit property, you are considered to have held it longer than 1 year, regardless of how long you actually held it. Publication 559 applies the same rule to an estate that sells.
So if the house goes up in value between the death and the sale, the gain is taxed at long-term capital gain rates, even if the sale happens a month after the funeral.
Proving the date-of-death value
The IRS can ask you to support the basis, so document it while the facts are fresh:
- A date-of-death appraisal from a licensed appraiser is the strongest evidence.
- The probate inventory value. Ohio requires an inventory within 3 months of the fiduciary’s appointment, valued as of the date of death (R.C. 2115.02). The Summit and Stark probate courts both accept the county’s tax value there, which may be lower than the market.
- A federal estate tax return. If Form 706 was filed or required, IRS Publication 523 says the value on that return is your basis, and Schedule A of Form 8971 reports it to you.
If the inventory used the auditor’s value and the house sold for much more, a separate appraisal can support a higher, more accurate basis. Ask a tax professional before relying on either.
When the estate sells instead of the heirs
If the executor sells the house during probate, the estate reports the sale. IRS Publication 559 says every domestic estate with gross income of $600 or more in a tax year must file Form 1041.
How a loss is treated depends on how the estate held the house. Publication 559 explains:
- If the personal representative intends to realize the value of the house through a sale, it is a capital asset held for investment, and a loss may be deductible. That holds even though it was the decedent’s residence and was never rented.
- If the house is held for a beneficiary to live in rent free and later sold without first converting it to investment use, any gain is capital gain but a loss isn’t deductible.
That makes a sale soon after the death, by an estate that always intended to sell, the most tax-friendly pattern when the market value is falling or selling costs are high.
Splitting the gain among several heirs
When siblings inherit a house together, each one owns a share of the basis and a share of the sale. Using round numbers, three children inherit equally a house worth $210,000 at the date of death and sell it 10 months later:
| Whole house | Each one-third share | |
|---|---|---|
| Basis (date-of-death value) | $210,000 | $70,000 |
| Sale price | $225,000 | $75,000 |
| Selling costs | $15,000 | $5,000 |
| Gain | $0 | $0 |
Each sibling reports their own share. If one heir paid for a new furnace or roof before the sale, ask a tax professional how to treat it: IRS Publication 551 explains that improvements generally add to basis, while ordinary repairs don’t. Keep receipts for every dollar spent on the house between the death and the closing, along with the closing statement, because those records support the numbers if the IRS asks.
The home sale exclusion rarely applies
The $250,000 exclusion ($500,000 for joint filers) described in IRS Topic 701 is for the sale of your main home. To qualify you must own it and live in it for at least 2 of the 5 years before the sale. An heir who moves in and lives there that long may qualify; most heirs who sell quickly do not.
They usually don’t need it. The step-up has already erased the parent’s decades of appreciation. The separate capital gains guide for selling your own home covers the exclusion in depth.
Reporting the sale
The closing agent normally issues a Form 1099-S to the seller, whether that is the estate or each heir. Heirs report the sale on Form 8949 and Schedule D, using the date-of-death value as basis. The 1099-S guide explains that form, and the Ohio inheritance tax guide confirms there is no Ohio tax on receiving the house.
A tax professional should prepare the return for your own sale. If you are weighing a quick sale against holding the house, our inherited house page explains the direct sale option, and the selling options page compares it with listing.
