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Will you owe taxes on an inherited house?
Often less than people fear. The main reason is the stepped-up basis: when you inherit a house, its tax basis usually resets to its value on the date of death. If you sell soon after for about that value, there’s little or no capital gain. There are exceptions, and Minnesota has its own estate tax for large estates. This guide covers the basics so you can have a better conversation with your tax professional. For the sale itself, see sell an inherited house.
We’re not tax advisors, and this isn’t tax advice. Talk to a CPA or tax attorney about your situation.
Stepped-up basis, in plain English
Basis is what the tax code treats as your cost in the property. Normally it’s what you paid plus improvements. When you inherit, the basis generally “steps up” to the fair market value on the date of death.
| Amount | |
|---|---|
| Parent bought the house (1978) | $48,000 |
| Value at date of death | $320,000 |
| Heir’s stepped-up basis | $320,000 |
| Heir sells 5 months later | $325,000 |
| Selling costs | -$0 to $20,000, depending on the path |
| Taxable gain | About $5,000 or less, possibly a loss |
Without the step-up, that gain would have been over $270,000.
When a gain can show up
- You hold it a long time and the value rises.
- You fix it up and sell for more than the date-of-death value (improvements add to basis, but so does the price).
- The house was co-owned with a surviving spouse or others; only the deceased person’s share may step up, depending on the ownership type.
- It was gifted before death rather than inherited. Gifts generally carry over the original basis instead of stepping up.
Documenting the date-of-death value
A written appraisal as of the date of death is the cleanest proof. A comparative market analysis can help too. Keep it with the estate records. If the estate sells to us soon after death, the purchase price itself is strong evidence of value.
The Minnesota estate tax
Minnesota has its own estate tax, separate from the federal one. It applies only to estates above a state threshold, which has been $3 million. The estate pays it, not the heirs, and most estates are well under it. If the estate is near the line, the personal representative should work with a tax professional before distributing anything.
Holding costs are a real expense
While the family decides, the estate pays property taxes, insurance, utilities, maybe a mortgage or reverse mortgage interest, and winter upkeep for a vacant house. Six months of those can easily cost more than any tax difference between selling now and later.
Other tax points to ask about
- Who reports the sale: the estate or the heirs, depending on timing and whether the house was distributed first.
- Selling costs: commission and closing costs reduce the gain.
- Rental use: if an heir rents it out first, different rules apply.
- Property tax proration: handled on the settlement statement at closing.
A practical plan
Get a date-of-death value documented. Decide on a path with numbers in hand, including holding costs. Close the sale through the estate if probate is open. Then give the settlement statement to your tax professional. Ryan can provide a CMA and a written comparison of a probate sale, a listing and a cash sale so your CPA has real figures.