Selling Inherited Property: Is the Money Considered Taxable Income?

Losing a loved one is difficult enough without having to navigate the complex world of tax law. If you’ve recently inherited property—whether it’s a family home, land, or other assets—and you’re considering selling it, one of the first questions you’ll likely ask is: “Do I have to pay taxes on the money I receive from the sale?”

The short answer is: It depends. While the inheritance itself is generally not considered taxable income for the recipient, the sale of that property can trigger capital gains taxes.

Here is a breakdown of how the IRS views the sale of inherited property and what you need to know before you file.

1. Understanding Your “Basis”

To determine if you owe taxes, you first need to understand your basis in the property. In simple terms, your basis is the value of the property used to calculate whether you made a profit or a loss when you sell it.

For inherited property, the basis is generally “stepped up” to the Fair Market Value (FMV) on the date of the decedent’s death.

  • Standard Rule: Your basis is the FMV on the date the person passed away.
  • Alternate Valuation: In some cases, usually involving large estates where an Estate Tax Return (Form 706) is filed, the executor may elect to use the FMV on an alternate valuation date.

Why does this matter? You are not taxed on the total amount of money you receive from the sale. You are only taxed on the gain.

  • If you sell for more than the basis: You have a taxable capital gain.
  • If you sell for the same or less than the basis: You generally have no taxable gain (and may potentially claim a loss).

2. Reporting the Sale to the IRS

Even if you determine that you don’t owe taxes, you may still need to report the transaction. Generally, the gross proceeds from the sale of inherited property are included in gross income when determining if you meet the threshold to file a tax return.

3. The Consistency Rule (Form 8971)

In 2015, Congress passed a law to ensure consistency between estate tax values and income tax basis. If the estate of the decedent was large enough to require filing a federal estate tax return (Form 706), the executor must provide beneficiaries with Schedule A of Form 8971.

This form tells you the value of the property as determined for estate tax purposes. You are required to use this value as your basis.

  • Warning: If you report a basis higher than the final estate tax value, you could be subject to an accuracy-related penalty. Always check with the executor to see if you received this form.

4. Special Circumstances

There are edge cases where the standard rules might not apply. For example:

  • The One-Year Rule: If you (or your spouse) gave the property to the decedent within one year before their death, special basis rules apply. (See IRS Publication 551 for details).
  • State Taxes: While this post focuses on federal taxes, remember that your state may have its own inheritance or capital gains tax laws.

The Bottom Line

Selling inherited property doesn’t automatically mean you owe a large tax bill, thanks to the “step-up” in basis. However, it does require careful record-keeping and accurate reporting.