Will you pay tax on selling inherited property?

Selling an inherited property can come with tax responsibilities, depending on factors like property value, timing, and location. Here’s an overview of each possible tax:

Inheritance taxes

Inheritance taxes apply in a limited number of U.S. states and are based on the value received by each beneficiary. Notably, this tax is the heir’s responsibility, not the estate’s.

“Only six states impose inheritance taxes: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania,” explains Nicole Green, a senior tax consultant with Robert Hall & Associates. “Basically, the state says they will tax anything over a set amount, which might be 500K. So if you get a house for 900K, you will pay the state maybe 2% of the 400K difference (or about $8,000).”

Rates and exemptions vary, so if the property is located in one of the six states, you may need to consider this tax, though close relatives often receive full or partial exemptions.

There is no federal inheritance tax.

Estate taxes

Estate taxes differ from inheritance taxes in that they’re levied on the estate’s total value before distribution to heirs. The federal estate tax exemption is substantial — over $13 million as of 2024 — so most estates aren’t affected. However, 12 states and the District of Columbia impose estate taxes, often with lower exemption thresholds. If the estate exceeds the state-level thresholds, a portion of its value may be taxed before beneficiaries receive their inheritance.

Both inheritance and estate taxes are sometimes called “death taxes.”

Gift tax

While not an immediate tax for a seller, if you inherit a property and decide to transfer it to someone else as a gift, the gift tax could apply. This tax affects transfers of significant value made during your lifetime, but there are annual and lifetime exclusions.

For example, you can give up to $18,000 (tax year 2024) per recipient per year without incurring a gift tax, and the lifetime exemption is currently set at $13.61 million. This is typically not a concern if you’re selling the property outright, but it’s helpful to know if you’re considering gifting it instead.

Capital gains taxes

Capital gains tax is one of the primary tax considerations for inherited property, especially if the property’s value has increased over time. When you sell an inherited property, capital gains taxes are calculated based on the difference between the sale price and the property’s “stepped-up” value, which is its fair market value at the date of inheritance.

In the next sections, we’ll explore how this stepped-up basis affects your tax obligations, whether you sell right away or hold onto the property for a while.