How does a capital gains tax work when selling inherited property?

I'm having to pay capital gains taxes on a house I inherited from my grandmother last year. She bought the place back in 1978 for around $65,000 and I just sold it for $425,000. The real estate agent mentioned something about a "step-up basis" but I have no idea what that means or how it affects my taxes. From what I understand, I might owe a significant amount in capital gains, but I'm worried I'm missing something important. Does anyone know how capital gains taxes work with inherited property? Do I have to pay taxes on the entire $360,000 difference between the original purchase price and the selling price? Or is there some special rule for inheritance? I'm freaking out a bit because that would be a HUGE tax bill and I wasn't planning for it. Any advice would be greatly appreciated!

0 coins

18 comments

Ryder Greene

•8M

You're in luck! With inherited property, you get what's called a "step-up in basis" to the fair market value of the property at the time of your grandmother's death. This means you don't pay capital gains tax on the appreciation that occurred during your grandmother's lifetime. So instead of using her original $65,000 purchase price as your basis, you use the property's value when you inherited it. For example, if the house was worth $380,000 when your grandmother passed away, your capital gain would only be $45,000 ($425,000 - $380,000), not $360,000. Make sure you get documentation of the property's value at the time of inheritance. This could be an appraisal done around that time or comparable sales in the neighborhood. This will save you thousands in taxes!

0 coins

Ryder Greene

•8M

Yes, that's exactly right! The tax code provides this step-up in basis specifically to avoid taxing decades of appreciation all at once. If you didn't get an appraisal at the time of death, you can still establish the value retroactively using comparable home sales from that period, tax assessments, or even hiring an appraiser now who can research historical values. Many professional appraisers can determine what a property was worth at a previous date. This step-up in basis rule applies to most inherited assets including stocks, land, collectibles, and other investments - not just homes. It's one of the most valuable tax benefits in the entire tax code!

0 coins

Theodore Nelson

•8M

I went through something similar last year with my dad's house. I was completely confused about capital gains until I found this tool at https://taxr.ai that analyzes your specific situation. I uploaded my inheritance documents and instantly got a breakdown of my step-up basis calculation and potential tax liability. The software walked me through exactly what documentation I needed to prove the property value at time of inheritance. Saved me from overpaying about $28,000 in capital gains taxes! The step-up basis rules are definitely confusing but this made it crystal clear what I owed.

0 coins

Theodore Nelson

•8M

Yes, it absolutely works for stocks and other investments too! The tool has specific sections for different types of inherited assets. For stocks, you just need the ticker symbols and approximate inheritance date, and it pulls historical pricing data to establish your basis. There's a free assessment that gives you a basic calculation. I found the detailed report worth it for peace of mind, especially with a high-value inheritance like property. They don't advertise pricing on their site since it depends on your situation complexity, but it was way less than what I saved in taxes.

0 coins

Ellie Simpson

•8M

I was skeptical about taxr.ai at first (I'm always wary of tax tools), but after trying it for my inherited stock portfolio, I'm genuinely impressed. Got a detailed report showing my step-up basis for 12 different stocks my father left me. Super clear documentation I could show my accountant. The best part was discovering I actually had a loss on some positions based on the stepped-up basis, which I was able to use to offset gains from selling the others. Would have completely missed this without their analysis. Definitely helped me avoid overpaying on my capital gains taxes!

0 coins

Arjun Kurti

•8M

If you're trying to contact the IRS about inheritance tax questions, good luck! I spent 3 weeks trying to get someone on the phone for clarification about my inherited property. Finally used https://claimyr.com which got me connected to an IRS agent in about 15 minutes instead of waiting on hold for hours. You can see how it works here: https://youtu.be/_kiP6q8DX5c Was honestly shocked it worked because I'd tried calling literally dozens of times before. The IRS agent confirmed I needed Form 8949 for reporting the sale and helped clarify some questions about documenting the step-up in basis that my accountant wasn't sure about.

0 coins

Arjun Kurti

•8M

The service basically uses technology to navigate the IRS phone system and wait on hold for you. When they finally get through to a real person, they call you to connect you with the agent. It's like having someone wait in line for you. I was confused too until I tried it. They're essentially using automated systems to constantly redial and navigate the phone tree until they get through. Then when an actual agent answers, you get a call to connect with them. Much better than sitting on hold for hours or getting disconnected repeatedly.

0 coins

Margot Quinn

•8M

I need to publicly eat my words about Claimyr. After my skeptical comment, I decided to try it anyway because I was desperate to resolve an inherited property question before filing taxes. It actually worked exactly as advertised - I got a call back within 20 minutes and was connected to an IRS representative. The agent confirmed everything about the step-up basis and helped me understand exactly what documentation I needed. Turns out I was overcomplicating things - they told me my county tax assessment from when I inherited the property would be sufficient proof of value. This literally saved me thousands in unnecessary capital gains taxes. Never been so happy to be wrong!

0 coins

Evelyn Kim

•8M

Don't forget to check if you qualify for the home sale exclusion too! If you lived in the inherited house as your primary residence for at least 2 of the 5 years before selling, you might be able to exclude up to $250,000 of the gain ($500,000 if married filing jointly). This is ON TOP OF the step-up in basis. So even if you had some gains after the step-up, you might not owe any taxes at all. My brother inherited mom's house, lived in it for 3 years, then sold it for a $75k gain over the stepped-up value and didn't owe a penny in capital gains.

0 coins

Evelyn Kim

•8M

That's a great question! If you owned 50% of the home and lived in it as your primary residence for the required time period, you can exclude up to $250,000 of your portion of the gain. Your sister, however, wouldn't qualify for the exclusion on her 50% if she didn't live there. So in this scenario, you would get the step-up in basis on your inherited 50%, plus the potential exclusion if you met the residency requirements, while your sister would only get the step-up in basis on her 50%.

0 coins