Receiving a phone call that changes everything is a common story for those who inherit property. One moment, you’re going about your day; the next, you learn a relative has passed away and left you their home. The property may be filled with memories, but it also comes with urgent questions. What do you do first? What about taxes and paperwork?
If you’re navigating the sale of an inherited property, you’re facing a complex financial decision during an already difficult time. This guide provides a clear, chronological path to help you make confident decisions and avoid costly mistakes, from understanding your legal standing to closing the sale.
Before you can even consider selling, you must confirm you have the legal right to do so. Your authority depends on how the property was passed down. If it was part of a will, you will likely need to wait for the probate process to conclude, which is when a court validates the will and grants you or an executor the power to act. However, if the property was held in a trust or under joint ownership with rights of survivorship, you may be able to bypass probate for a much faster process. Consulting with the estate attorney is the essential first step to clarify your authority and timeline.
If you share the inheritance with siblings or other heirs, the next step is to get everyone on the same page. Open communication is critical to agree on key decisions, such as whether to sell the property, the target listing price, and how to split the proceeds. It’s wise to put these agreements in writing to prevent future conflicts. Should one heir wish to keep the property, they can often buy out the others based on a mutually agreed-upon value.
With your legal authority confirmed, the next step is to understand the financial and tax landscape. Fortunately, the IRS has rules that are highly favorable to heirs.
The most important concept is the stepped-up basis. When you inherit property, its tax basis is adjusted or “stepped up” to its fair market value on the date of the original owner’s death. This means you are not responsible for the taxes on the appreciation that occurred during the original owner’s lifetime. For example, if your parents bought a home for $150,000 and it was worth $400,000 on the day they passed, your new basis is $400,000.
This stepped-up basis is used to calculate your capital gains when you sell. You only owe tax on the difference between the sale price and this new, higher basis. Even better, inherited property automatically qualifies for long-term capital gains tax rates, which are significantly lower than ordinary income tax rates.
Key Takeaway: The stepped-up basis means you only pay tax on the property’s appreciation after the date of inheritance, not on the decades of growth it may have already gained.
To claim the stepped-up basis, you need proof. This is why a professional, date-of-death appraisal is not just recommended, it’s essential. This formal valuation establishes the property’s fair market value and serves as your IRS-compliant documentation. Without it, you could face challenges from the IRS or end up paying far more in taxes than necessary.
When choosing an appraiser, it’s vital to work with a USPAP-compliant professional who has specific experience in estate valuations. Their report must be detailed enough to meet strict IRS standards, providing you with defensible documentation you can rely on for years to come.
Critical Warning: Skipping a professional appraisal is the costliest mistake an heir can make. The small fee for an appraisal is minimal compared to the thousands you could overpay in taxes without a documented stepped-up basis.
Once you have your legal and financial foundations in place, you can proceed with the sale.
First, prepare the property. This involves addressing any outstanding financial obligations, such as the mortgage, property taxes, or HOA dues, which must be settled before or at closing. You will also need to decide whether to sell the home “as-is” or make improvements. The process typically includes clearing out personal belongings, handling necessary repairs, and deep cleaning the home to make it presentable.
Pro Tip: Keep detailed records of all selling expenses, including repairs, real estate commissions, and closing costs. These are deductible and can significantly reduce or even eliminate your capital gains tax.
Next, it’s time to list and market the home. Work with a real estate agent who has experience with estate sales. They can help you set a competitive price based on market conditions, not emotion. You will also need to complete the required seller disclosures. As an heir, you must be honest about what you know about the property’s condition, but it is acceptable to state “no knowledge” for aspects you are unfamiliar with.
Finally, you will navigate the closing process. At closing, you will sign documents to transfer ownership to the buyer. A title company or attorney will handle most of the paperwork and ensure that proceeds are distributed correctly according to the will or trust. Be sure to save all closing documents, receipts, and the final settlement statement for your tax records.
Selling an inherited home can be a smooth process if you avoid a few common mistakes. The most costly error is skipping a professional appraisal, as this forfeits your right to the stepped-up basis and can lead to a massive, unnecessary tax bill.
Another pitfall is neglecting the property while it sits vacant. A neglected home is vulnerable to vandalism, weather damage, and pests, all of which diminish its value. Ensure the insurance is active and the property is checked on regularly. Lastly, don’t let emotion drive your financial decisions.
Remember: While a home holds priceless memories, its sale price must be based on market data. Rely on your professional team to guide you toward a financial decision that honors your family’s legacy without sacrificing your financial well-being.
Q: What if there’s still a mortgage on the property?
A: The mortgage must be paid off at closing from the sale proceeds. Contact the lender early in the process to get a payoff statement.
Q: Do I pay inheritance tax on the property itself?
A: Federal inheritance tax is rare due to a very high exemption threshold ($13.61 million per person in 2024). However, a handful of states have their own inheritance or estate taxes with lower thresholds, so be sure to check your state’s laws.
Q: How long do I have to sell inherited property?
A: There is no deadline. However, the longer you wait, the more the property may appreciate, potentially increasing your capital gains tax bill. You must also account for the carrying costs of holding the property.
Inheriting property brings both opportunity and responsibility. By following a clear, chronological path, you can manage the process effectively.
Your immediate action items should be to confirm your legal authority, order a professional appraisal to establish your stepped-up basis, and consult with a tax professional to understand your specific financial implications. From there, you can make an informed decision about selling.
The key is to act from a place of knowledge, not emotion. Take the time to understand your options, work with qualified professionals, and make the choice that best serves your financial interests.
The foundation of a successful inherited property sale is an accurate, IRS-compliant appraisal. It establishes your stepped-up basis and protects you from overpaying on taxes.
Appraise It Now provides USPAP-compliant real estate appraisals designed specifically for estate and tax purposes. Our credentialed appraisers understand IRS requirements and deliver defensible valuations you can trust.
Don’t leave thousands of dollars on the table by skipping this critical step. Contact us for a free quote today and take the first step toward a confident, compliant property sale.
This article provides general information and should not be considered legal or tax advice. Consult with qualified professionals regarding your specific situation.
