When you inherit a home and sell it, you pay capital gains tax based on the value of the home on the date of the owner’s death. For example, if you inherit your dad’s vacation cabin, and it was worth $300,000 when he died, and you later sell it for $325,000, you’ll pay tax on the $25,000 gain.
The value of the house at the time of the owner’s death is called the stepped-up basis. If your parents purchased the cabin decades ago for $100,000, your gain isn’t based on this number. It’s calculated on the stepped-up value of the property at the owner’s death.
If you make improvements to the property before the sale, you can subtract those expenses from your capital gain calculation. If you sell for less than the property’s stepped-up basis, you can deduct the loss up to $3,000 per year, rolling over more than that into future years.
Stepped-up basis applies to all inherited assets, including jewelry, vehicles, stocks and bonds. To find out the best option in your circumstances, consult with your attorney.