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Do you pay capital gains tax on an inherited house?

The stepped-up basis rule means most people owe far less than they fear, and often nothing at all. Here is how it actually works.

Do you pay capital gains tax on an inherited house?

Usually far less than people expect, and often nothing. The reason is a rule called stepped-up basis.

When you buy a house, your cost basis is what you paid. When you INHERIT one, the basis generally resets to what the property was worth on the date the previous owner died. All the appreciation that happened during their lifetime effectively disappears for tax purposes.

So if your mother bought her Duluth house in 1974 for $28,000, it was worth $210,000 when she died, and you sell it for $215,000, your taxable gain is measured against the $210,000, not the $28,000. On those numbers the gain is roughly $5,000, not $187,000.

Is the money from selling an inherited house considered income?

The inheritance itself is generally not treated as taxable income at the federal level. What can be taxed is the gain between the stepped-up basis and what you sell for.

Sell soon after inheriting and that gap is usually small, because the value has not moved much. Hold the property for years while it appreciates and the gap grows.

What about Minnesota and Wisconsin?

Minnesota has its own estate tax with a threshold that changes over time, and it applies to the estate rather than to you as the person selling. Wisconsin does not currently levy an estate or inheritance tax, which is one more way a Superior property differs from a Duluth one.

Thresholds and rates move. Do not plan around a number you read on a website, including this one.

Get the date-of-death value in writing

The stepped-up basis only helps if you can show what the property was worth on that date. An appraisal or a written valuation from that time is worth getting, and it is much easier to obtain then than three years later.

This is the single most common thing families skip, and it is the one that costs them.

A necessary caveat

This is general information, not tax advice, and every estate has its own facts. Talk to a CPA or an estate attorney before you make a decision based on any of it. What we can tell you is the sale side: we buy inherited houses in the Twin Ports as they stand, contents included, and you do not need to clear the house out first.