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

Stepped-up basis is one of the most important tax features of inheriting property.

How it works:

When you inherit a property, your cost basis for federal capital gains purposes is "stepped up" to the property's fair market value on the date of death — not what your parents paid for it.

Example: - Parents bought home in 1985 for $200K. - Date of death market value (2026): $1.5M. - Your stepped-up cost basis: $1.5M. - You sell three months later for $1.5M. - Federal capital gains: $0.

The savings vs. selling pre-death: - If your parents had sold the home themselves, they'd owe federal capital gains tax on $1.3M of gain ($1.5M - $200K basis), minus the $250K/$500K primary residence exclusion if they qualified. - Federal long-term capital gains: 15-20% depending on income. - California capital gains: ~9.3%. - Selling pre-death could have meant $200K-$300K+ in tax.

What if you hold the inherited property and sell later? - Gains accumulate from the stepped-up basis (date-of-death value). - If you hold for 5 years and the property appreciates to $1.8M, you'd have $300K of gain — taxable when you sell.

Selling shortly after inheritance generally minimizes capital gains. Holding and selling later means appreciation from the date of death becomes taxable.

This is general information. Your CPA needs to do the actual math for your situation.

This is a starting point, not the complete answer. Real estate decisions depend on details that don't fit in an FAQ — your numbers, your timeline, your family situation. Call (510) 504-0402 during the day, text or call (406) 205-9003 anytime, or email roger@grubb.net. I'll walk you through it personally.