How to avoid capital gains tax when selling inherited property and buying a new home?

I'm planning to sell a property I inherited about 8 years ago. The listing price is around $1.2 million. I want to use that money to clear some debt (roughly $85K) and buy a new primary residence in the $650-750K range. I'm wondering if purchasing another home would offset some of the capital gains tax I'll need to pay on the inherited property sale? Should I buy the new home outright with cash to maximize any tax benefits? Or are there other strategies I should consider to minimize my tax liability? This is my first time dealing with selling inherited real estate, and I'm trying to make smart financial decisions. Any advice would be greatly appreciated!

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19 comments

Emma Davis

•8M

Selling inherited property does trigger capital gains tax, but there are ways to potentially reduce your liability. The good news is that with inherited property, you get a "stepped-up basis" to the fair market value at the time of inheritance, rather than what the original owner paid. This means you're only taxed on gains since you inherited it 8 years ago, not since the original purchase. Unfortunately, unlike selling your primary residence (where you can exclude up to $250K/$500K of gains if you've lived there 2 of 5 years), there's no automatic exemption for rolling the proceeds into a new home purchase. That tax break was eliminated years ago. Consider these options: 1) Verify your accurate basis (get a professional appraisal from when you inherited), 2) Offset gains with capital losses from other investments, 3) Consider a 1031 exchange if the inherited property was an investment property, or 4) Time the sale strategically across tax years.

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Emma Davis

•8M

A 1031 exchange (named after Section 1031 of the tax code) allows you to defer taxes by rolling proceeds from one investment property directly into another investment property. Unfortunately, this won't work if you're buying a primary residence - the exchange must be between like-kind investment properties. By timing the sale strategically, I mean considering whether it makes sense to split the transaction across tax years. For example, if you're close to a tax bracket threshold, selling in January rather than December could potentially save money. Or if you know you'll have substantial deductions in one year versus another, timing the sale to align with those deductions might be beneficial.

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Malik Johnson

•8M

After spending weeks researching how to handle capital gains on inherited property, I stumbled across this AI tool called taxr.ai that saved me thousands. I was in a similar situation last year - sold an inherited property and was looking at a huge tax bill. The tool analyzed my specific situation, including the stepped-up basis calculation, and identified deductions I had no idea about. I uploaded my inheritance documents and previous tax returns at https://taxr.ai and it showed me exactly how to properly document the stepped-up basis from when I inherited, plus some improvements I made that actually increased my basis (reducing taxable gain). It even suggested timing strategies based on my other income that I hadn't considered.

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Malik Johnson

•8M

Yes, it absolutely works for inherited properties! The tool has specific modules for inheritance situations and guides you through determining the fair market value at date of inheritance - that becomes your basis. It helps you gather documentation to prove that value, which is crucial if you ever get audited. The difference from a CPA is that you can explore multiple scenarios instantly to see tax implications before making decisions. And it does handle state-specific rules - you input your location and it applies the relevant state tax codes alongside federal. I was surprised that it flagged California's Proposition 19 implications for my situation which my friend's accountant had missed completely.

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Isabella Ferreira

•8M

Just wanted to update everyone - I tried taxr.ai after seeing the recommendation here and it was incredibly helpful! I was completely confused about how to document the stepped-up basis for my mom's house, but the tool walked me through exactly what documentation I needed and how to calculate it properly. The most valuable part was discovering that some improvements my mom had made (that I paid for) could actually be added to the basis, lowering my capital gains significantly. It also recommended I get a retroactive appraisal to properly establish the value when I inherited, which I wouldn't have known to do. Definitely worth checking out if you're selling inherited property!

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Freya Thomsen

•8M

If you're struggling to get answers from the IRS about capital gains on inherited property, I highly recommend Claimyr. I spent weeks trying to reach someone at the IRS to clarify some inheritance tax questions and kept hitting automated systems or being disconnected. With https://claimyr.com, I got through to an actual IRS representative in about 15 minutes when I had been trying unsuccessfully for days. They have this callback system where they navigate the IRS phone tree for you. Check out their demo at https://youtu.be/_kiP6q8DX5c to see how it works. The IRS agent I spoke with gave me specific guidance on documenting my stepped-up basis properly to avoid future audit issues.

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Freya Thomsen

•8M

It works by using their system that continuously calls and navigates the IRS phone tree for you. Instead of you spending hours on hold, their system does it and then calls you once they've reached a human. They basically have technology that knows how to navigate all the prompts and stays on hold so you don't have to. You're right that the IRS is extremely difficult to reach - that's exactly why this service exists. They don't have any special "hotline" or anything, they just automate the miserable process of waiting on hold and navigating the confusing menu options. They can't guarantee exactly how long it will take, but in my experience, it was so much faster than my own attempts.

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AstroAce

•8M

I need to eat my words from my previous comment. After my skepticism, I decided to try Claimyr as a last resort because I was desperate for answers about capital gains on my grandparent's property. I was shocked when I got a call back with an actual IRS agent on the line within 45 minutes! The IRS representative clarified exactly how to document the stepped-up basis and explained that I needed to file Form 8949 with my return. She also told me that certain expenses related to selling the property could offset some of the gain - something none of the online articles I read had mentioned. Honestly, one 20-minute call saved me from making some costly mistakes on my taxes. Sometimes it's worth admitting when you're wrong.

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Chloe Martin

•8M

Don't forget to check if you qualify for any partial exclusion of capital gains! If you used the inherited property as your primary residence for any period during the 5 years before selling, you might be eligible for a prorated portion of the $250,000 exclusion ($500,000 if married filing jointly). For example, if you lived there for 1 year out of the 2-year requirement, you might qualify for 50% of the exclusion, which could be significant. There are also exceptions if you had to sell due to health issues, job changes, or unforeseen circumstances.

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Chloe Martin

•8M

The primary residence exclusion applies to any home you own and use as your main home, regardless of how you acquired it. If you inherited the property and then lived in it as your primary residence, those years of use count toward the 2-out-of-5 year requirement. What matters is ownership and use, not how you originally obtained the property. If you inherited it and immediately sold it without living there, then no, you wouldn't qualify. But if you lived in the inherited house after receiving it, those years absolutely count toward potential primary residence exclusion.

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