How much in taxes will I owe when I sell an inherited property?

If you inherit property, you may wonder if you’re responsible for paying taxes. Luckily, there’s no federal inheritance tax, although some states do have inheritance taxes. But for most people, inheriting property doesn’t trigger an immediate tax liability.

When you inherit property the property is usually worth more than it was when the original owner purchased it. If you were to sell the property, there could be huge capital gains taxes. Fortunately, when you inherit property, the property’s tax basis is “stepped up,” which means the basis would be the current value of the property.

For example, suppose you inherit a house that was purchased years ago for $200,000 and it is now worth $300,000. You will receive a step up from the original cost basis from $200,000 to $300,000. If you sell the property right away, you will not owe any capital gains taxes. If you hold on to the property and sell it for $350,000 in a few years, you will owe capital gains on $50,000 (the difference between the sale value and the stepped-up basis).