Selling Inherited Property: How Taxes Come Into Play

If you’ve recently inherited property and are thinking about selling it, you may be unsure how much the asset is worth and whether you’ll owe tax on the sale. Understanding how the IRS determines value and how that affects gain or loss is essential before moving forward.

Understanding your basis

The starting point for calculating tax on inherited property is its basis, which generally equals the asset’s fair market value (FMV) on the date the original owner passed away. In some cases, the estate’s executor can choose an alternate valuation date six months later, but this option is only allowed if a federal estate tax return (Form 706) was required and filed under special rules.

In earlier years, more estates met the filing threshold, but today the federal exemption is nearly $14 million, meaning only a small percentage of estates must file Form 706. When a return is filed, the executor must report the FMV of distributed assets on Form 8971. Beneficiaries receive a Schedule A from that form, which shows the official valuation used for basis purposes.

If no estate return was filed and you were not provided an FMV, you must establish the property’s value yourself. The IRS typically accepts documentation from a qualified appraiser. Keeping accurate records is important, especially if the sale is later reported to the IRS through forms such as a 1099-K. Overstating your basis, or failing to substantiate it, can result in penalties or additional tax with interest.

What happens when you sell?

If the property has increased in value since you inherited it, the difference between the sale price and your basis is considered a capital gain. Most inherited assets are treated as capital assets, so these gains are reported on Schedule D and taxed at capital gains rates based on your income level.

If the property sells for less than its basis, the result is a capital loss. However, losses on personal-use property are not deductible, so you generally cannot claim a tax benefit from such a sale.

Getting help

Because a mistake in establishing or reporting basis can delay your refund or lead to costly penalties, many beneficiaries choose to work with a CPA. A tax professional can help verify the property’s value, calculate any gain, and ensure proper reporting so you stay compliant from the start.

When dealing with inherited property, taking the time to get the numbers right can save you significant trouble later.