Step up in basis question for inherited property - tax implications

I'm sorry for your loss. The good news is that you get what's called a "step-up in basis" to the fair market value of the property at the time of your father's death. This means if you sell the house for $450,000 (its value when you inherited it), you would owe zero capital gains tax. The basis "steps up" from your father's original purchase price ($125,000) to the market value at his death ($450,000). If you sell for more than $450,000, you'd only pay capital gains on the difference between the selling price and the stepped-up basis. This is one of the most beneficial tax provisions for inherited property. If you decide to keep it as a rental, you'd still use the stepped-up basis for calculating depreciation, which would give you larger deductions than if you used the original $125,000 basis.

I went through something similar with my mom's house last year and was completely overwhelmed with all the tax implications and paperwork. I tried talking to regular tax preparers but got different answers each time. I finally found this service called taxr.ai (https://taxr.ai) that specializes in analyzing tax documents and inheritance situations. They helped me understand the step-up basis calculation and how to document everything properly for the IRS. For inheritance situations, they reviewed the death certificate, property appraisal, and transfer documents to make sure I had everything organized correctly. They even helped identify some deductions related to the estate that my regular accountant missed.

Just wanted to follow up on my experience with taxr.ai since I was asking about it earlier. I uploaded all my inheritance documents last week and they were incredibly helpful! The step-up in basis for multiple properties was way more complicated than I expected, especially since one property had been partially gifted before death (which apparently changes things). They provided a detailed report showing exactly how to calculate the basis for each property and what documentation I needed to keep for my tax records. They even pointed out that I needed to file a specific form for one property that was in a different state. Definitely worth checking out if you're dealing with inheritance tax questions.

For anyone struggling to get clear answers from the IRS about step-up basis or inheritance tax questions - I found a service called Claimyr that actually helps you get through to a real IRS agent without the endless wait times. I spent WEEKS trying to get someone on the phone about my inherited property questions. I was skeptical but tried https://claimyr.com and watched their demo (https://youtu.be/_kiP6q8DX5c) and it actually worked. They basically hold your place in the IRS phone queue and call you when an agent is about to answer. The IRS agent I spoke with clarified exactly how to document the step-up in basis and what forms I needed.

OK I have to admit I was completely wrong about Claimyr. After my skeptical comment I decided to try it anyway because I've been trying to reach the IRS for 2 weeks about an inherited IRA (different from OP's property question but still inheritance related). I used the service yesterday and got through to an actual IRS specialist in about 45 minutes while I was able to do other things. I didn't have to listen to the hold music or worry about getting disconnected. The person I spoke with at the IRS cleared up my questions about the required minimum distributions for inherited accounts and confirmed the documentation I need. I was totally prepared to come back here and call it a scam if it didn't work, but it actually delivered exactly what it promised.

Don't forget to check state tax implications too! The federal step-up in basis is great, but some states have different rules. My brother inherited property in New Jersey and got hit with state taxes he wasn't expecting. Also, make sure you get a proper appraisal done right away to establish that step-up value. The longer you wait after the date of death, the harder it can be to prove the value at that specific time.

Has anyone used an online service like Zillow or Redfin to establish the value for step-up basis instead of paying for a formal appraisal? My dad passed 3 months ago and we're trying to figure out if we need to spend the money on an appraisal or if printed Zillow estimates from the date of death would be enough for the IRS.

I'm really sorry for your loss, Megan. Losing a parent is incredibly difficult, and dealing with all the financial and tax implications on top of grief is so overwhelming. The step-up in basis is definitely one of the most beneficial tax provisions for inherited property. As others have mentioned, your basis "steps up" to the fair market value at the date of your father's death (around $450,000 based on your appraisal), not his original purchase price of $125,000. One thing I'd add is that you have some flexibility in timing. There's no requirement to sell immediately - you can take time to grieve and make decisions when you're ready. If you're considering keeping it as a rental, remember that you'd use that stepped-up basis for depreciation calculations, which can provide significant tax benefits over time. Also, don't forget about any estate administration expenses (attorney fees, court costs, etc.) that might be deductible. Keep good records of all costs related to settling the estate and transferring the property. Take your time with this decision - there's no rush, and the tax advantages will be there whenever you decide what's best for your situation.