The gain starts at the date of death
When you sell something you inherited, the gain is not measured from what the person who died paid for it. Section 1014 of the Internal Revenue Code gives an heir a basis equal to the property's fair market value at the date of death. Your gain is the sale proceeds, after selling costs, minus that value.
For an asset that grew over decades, this removes most of the gain. Shares bought for $40,000 and worth $300,000 when their owner died have a basis of $300,000 in the hands of the heir. Sold for $305,000, they produce a $5,000 gain. The $260,000 of growth during the owner's lifetime is never taxed as a capital gain by anyone.
From there the basis moves in the usual way. Improvements an heir makes to inherited property are added to it, and depreciation claimed while renting it out reduces it, as IRS Publication 551 describes for any other asset.
The rule works in both directions. If the asset was worth less at death than the owner paid, the heir's basis is the lower value, and the owner's unrealized loss disappears with them. The adjustment is to the value at death, whichever way that goes, which is why the popular name for it tells only half the story.
Every sale counts as long-term
The one-year line works differently for heirs. Section 1223(9) treats inherited property sold within a year of the death as held for more than a year, so the gain is taxed on the long-term ladder of 0%, 15% and 20% even if you sell a week after receiving it. Keep it for more than a year after the death and it is long-term in the ordinary way.
That matters most for an heir with a high income, for whom a short-term gain would be taxed at ordinary rates. It also means the holding period gives no reason to wait before selling an inherited asset, although other things may, such as an estate that has not yet been settled.
In the calculator, choose "More than a year" for how long you owned it, whatever your dates say. The date fields work out a holding period from a purchase date, and an inheritance does not have one in that sense. For the cost basis, enter the value at the date of death.
Which value counts, and proving it
IRS Publication 551 lists the possibilities. Usually it is the fair market value at the date of death. If the executor elects alternate valuation on the federal estate tax return, it is the value on the alternate valuation date instead (section 2032). Farm and business real estate valued under the special-use method, and land under a qualified conservation easement, follow their own rules.
Where an estate tax return is required, the executor may send each beneficiary a Schedule A (Form 8971) stating the value reported for estate tax, and section 1014(f) requires certain beneficiaries to use that value as their starting basis. When no estate tax return is filed there is no such statement, and the value is whatever you can document.
That evidence is worth gathering while it is easy to get: an appraisal as of the date of death for real estate or a business interest, and statements showing the value of securities on that date. Without it, the gain on a later sale has no defensible starting point.
It does not matter who sells. Section 1014(b)(1) counts property the estate acquires from the decedent as acquired from the decedent, so an executor selling before distribution measures the gain from the same date-of-death value an heir would.
Married couples: half the property, or all of it
Property a married couple held as joint tenants with right of survivorship, or as tenants by the entirety, with no other owners, is a qualified joint interest. Section 2040(b) includes half of it in the estate of the first spouse to die, so that half takes a new basis at the date of death while the survivor keeps the original basis on the other half.
Community property is treated more generously. In Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin, Publication 551 explains that the whole of the community property generally takes a basis equal to its value at the first death, including the surviving spouse's own half. Section 1014(b)(6) is the provision, and it applies when at least half of the community interest is included in the decedent's gross estate.
In numbers: a house bought for $200,000 and worth $900,000 at the first death has a new basis of $550,000 as a joint tenancy, half the value at death plus half the original cost. As community property the new basis is the full $900,000, so a sale at that price produces no gain at all.
What gets no step-up
Section 1014(c) switches the rule off for income in respect of a decedent: income the person had a right to but had not yet been taxed on (IRS Publication 559). The largest everyday example is a traditional IRA. Rev. Rul. 92-47 treats a beneficiary's distribution of the balance as income in respect of a decedent, and Publication 590-B tells beneficiaries of a traditional IRA to include taxable distributions in gross income. That income is ordinary income, not a capital gain, and this calculator does not model it.
Section 1014(e) closes a planning loop. Appreciated property given to someone within a year of their death, which then passes back to the person who gave it or to that person's spouse, keeps the decedent's basis instead of stepping up. Publication 551 describes the same rule from the side of the heir.
A gift and an inheritance are taxed very differently
Property received as a gift during the giver's life keeps the giver's basis under section 1015(a), and section 1223(2) adds the giver's holding period to your own. The growth the giver built up travels with the asset and is taxed when you sell. For a gift that has fallen in value there is a second rule: if the giver's basis was above the value at the time of the gift, that lower value is your basis for working out a loss.
For an appreciated asset, giving it now or leaving it later can therefore be worth a large amount of tax to the person who receives it. The examples below price one version: the same shares, sold for the same price, received once by inheritance and once as a lifetime gift.
A carried-over gain can also be large enough to reach the 3.8% net investment income tax, which starts at $200,000 of modified adjusted gross income for a single filer. The gift example crosses it; the inheritance does not.
None of this is estate tax, which is a separate charge on large estates, and none of it is state inheritance tax. Both are outside what this site calculates.
Selling an inherited house
The home sale exclusion in section 121 depends on your own ownership and use, two of the five years before the sale, so an heir who never lived in the house usually cannot claim it. The step-up tends to matter more. A sale soon after the death, at a price close to the date-of-death value, produces a small gain, and selling costs such as agent commissions come off the amount realized.
Rent the house out or move into it before selling, and the rules for that use apply from then on. The real estate guide sets out how each of those is taxed, and the state layer applies on top wherever you live.
Worked example
Computed by the calculator's own engine when this page was built. Open the derivation for every rule and citation.
Shares sold four months after the death
A single heir with $95,000 of wages inherits shares worth $250,000 at the date of death and sells them four months later for $268,000.
- Taxable income after deduction
- $96,900
- Taxable gain
- $18,000
- Tax owed without the sale
- $12,070
- Tax the sale added
- $2,700
- Total federal tax
- $14,770
- Effective rate on the gain
- 15%
The gain is $18,000, measured from the value at death, and it is long-term despite the four months. The sale adds $2,700 to the federal bill.
Caveats on this example (1)
- Net investment income was derived from capital gains and qualified dividends only. Interest, non-qualified dividends, rents, royalties and passive business income included in your other income are also net investment income under IRC 1411(c) and are not counted here.
Show the working — 12 steps, each with its citation
- Net short-term capital gain or loss for the year$0
Assets held one year or less. Taxed at ordinary rates if a net gain.
- Net long-term capital gain or loss for the year$18,000
Assets held more than one year. Eligible for the 0/15/20% rates.
- Standard deduction-$16,100
Adjusted gross income of $113,000 less $16,100.
- Taxable income$96,900
The figure the rate tables and the capital gain ceilings are both measured against.
- Ordinary income taxed at 10%$1,240
$12,400 of taxable income between $0 and $12,400.
- Ordinary income taxed at 12%$4,560
$38,000 of taxable income between $12,400 and $50,400.
- Ordinary income taxed at 22%$6,270
$28,500 of taxable income between $50,400 and $78,900.
- Ordinary income stacked below the long-term gain$78,900
Long-term gain is taxed by reference to where it sits ON TOP of $78,900 of other taxable income, not from the bottom of the rate table.
- Long-term gain taxed at 15%$2,700
Gain between the $49,450 zero-rate ceiling and the $545,500 15% ceiling.
- Net investment income tax threshold$200,000
Modified AGI of $113,000 against the $200,000 threshold for a single filer. This threshold is statutory and is not adjusted for inflation.
- Net investment income tax does not apply$0
Modified AGI is $87,000 below the threshold.
- Total tax$14,770
$14,770 on $113,000 of total income, an effective rate of 13.07%.
The same shares, given during life
The owner had paid $60,000 for the shares and gave them away while alive. The heir sells for the same $268,000.
- Taxable income after deduction
- $286,900
- Taxable gain
- $208,000
- Tax owed without the sale
- $12,070
- Tax the sale added
- $35,114
- of which net investment income tax
- $3,914
- Total federal tax
- $47,184
- Effective rate on the gain
- 16.88%
With the owner's $60,000 basis carried over, the gain is $208,000 and the sale adds $35,114, including $3,914 of net investment income tax. Receiving the same shares by inheritance costs $32,414 less.
Caveats on this example (1)
- Net investment income was derived from capital gains and qualified dividends only. Interest, non-qualified dividends, rents, royalties and passive business income included in your other income are also net investment income under IRC 1411(c) and are not counted here.
Show the working — 12 steps, each with its citation
- Net short-term capital gain or loss for the year$0
Assets held one year or less. Taxed at ordinary rates if a net gain.
- Net long-term capital gain or loss for the year$208,000
Assets held more than one year. Eligible for the 0/15/20% rates.
- Standard deduction-$16,100
Adjusted gross income of $303,000 less $16,100.
- Taxable income$286,900
The figure the rate tables and the capital gain ceilings are both measured against.
- Ordinary income taxed at 10%$1,240
$12,400 of taxable income between $0 and $12,400.
- Ordinary income taxed at 12%$4,560
$38,000 of taxable income between $12,400 and $50,400.
- Ordinary income taxed at 22%$6,270
$28,500 of taxable income between $50,400 and $78,900.
- Ordinary income stacked below the long-term gain$78,900
Long-term gain is taxed by reference to where it sits ON TOP of $78,900 of other taxable income, not from the bottom of the rate table.
- Long-term gain taxed at 15%$31,200
Gain between the $49,450 zero-rate ceiling and the $545,500 15% ceiling.
- Net investment income tax threshold$200,000
Modified AGI of $303,000 against the $200,000 threshold for a single filer. This threshold is statutory and is not adjusted for inflation.
- Net investment income tax at 3.8%$3,914
3.8% of $103,000, the lesser of net investment income ($208,000) and the amount by which modified AGI exceeds the threshold ($103,000). Here the binding figure is the excess of modified AGI over the threshold.
- Total tax$47,184
$47,184 on $303,000 of total income, an effective rate of 15.57%.
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