Do I have to pay income tax on money or property I inherit?

No. IRC §102(a) excludes property acquired by bequest, devise, or inheritance from gross income, so receiving the house costs you nothing in federal income tax. What is taxable is what happens afterward: appreciation between the date of death and the sale, rent while you hold it, and distributions from inherited retirement accounts, which are income in respect of a decedent under §691 and get no step-up in basis.

Is the step-up in basis a loophole that gets audited?

It is the plain text of IRC §1014, in the code since the Revenue Act of 1921, and claiming it is not aggressive. What gets examined is the value, not the rule. Auditors challenge a date-of-death figure that came off an assessor's card or an online estimate, and a retrospective appraisal from a licensed appraiser is what ends that conversation. Estates that file Form 706 are locked in tighter still, because §1014(f) caps basis at the value finally determined for estate tax purposes.

How much tax will I owe if the house sat for three years and went up $90,000?

The $90,000 is a long-term capital gain under §1223(9), taxed at 0%, 15%, or 20% depending on your total taxable income. For 2026 a single filer pays 0% up to $49,450 of taxable income, 15% up to $545,500, and 20% above that, per Rev. Proc. 2025-32. The 3.8% net investment income tax also applies once modified AGI clears $200,000 single or $250,000 married filing jointly, so the all-in federal cost on that $90,000 runs anywhere from $0 to $21,420, and for most sellers lands between $13,500 and $16,920.

My siblings and I inherited the house together. How do we split the reporting?

Each of you reports a fractional share. Three equal heirs each report a third of the gross proceeds and a third of the date-of-death value on their own Form 8949, Part II, with INHERITED in column (b). If the estate or trust still held title and sold the house during administration, the sale goes on Form 1041 instead and the gain is allocated to the beneficiaries on Schedule K-1, which is the cleaner path when the heirs sit in different brackets.

Do I owe anything if I keep the house instead of selling it?

Not in federal income tax. The basis is set at the date of death under §1014(a)(1) and nothing is due until a sale, so holding the property costs only property tax, insurance, and upkeep. Two things change if you rent it out: depreciation starts on the stepped-up basis over 27.5 years, and that depreciation comes back later as unrecaptured §1250 gain taxed at up to 25%. Five states also charge an inheritance tax on the receipt itself, whether or not you ever sell.

The Journal / Estate & Wealth

Taxes on Selling an Inherited House: The Gain Starts at the Date of Death.

By Ewan Morkel, EASeptember 13, 20266 min read

Your basis in an inherited house is its value on the day the owner died, not what the owner paid for it. On a house bought for $95,000 in 1994 and sold for $448,000 in 2026, that one rule turns a $48,582 federal tax bill into $666 apiece.

Contemporary residential home behind a green yard and trees

Two siblings inherit their mother's house. She bought it in 1994 for $95,000, it appraises at $410,000 the week she dies, and ten months later it closes at $448,000. The question that arrives with the settlement statement is some version of the same one every time: how much of this goes to the IRS. Taxes on selling an inherited house rarely work the way people brace for. The taxable gain here is $8,880, not $323,880, and the federal tax runs about $666 apiece.

The step-up

Taxes on selling an inherited house start at the date-of-death value.

IRC §1014(a)(1) resets the basis of nearly everything a person owns at death to its fair market value that day. Thirty-two years of appreciation on the house above, $315,000 of it, is never taxed to anybody. Not to your mother, because she died owning it, and not to you, because you didn't inherit her basis along with her house. That is the whole reason the number at the end is small.

Two other taxes get confused with this one and neither is yours. The federal estate tax is paid by the estate, not the heir, and the 2026 basic exclusion amount under §2010(c)(3) is $15,000,000, so it reaches almost nobody. An inheritance is not income either: §102(a) keeps bequests out of gross income. You're taxed on what the house does after you get it, not on getting it.

There is one alternative to the date-of-death value and it is narrower than it sounds. §2032 lets an estate value everything six months after death instead, and that value becomes the heir's basis. The election exists only on a filed Form 706, and only if it lowers both the gross estate and the estate tax. An estate that owes no estate tax cannot make it, which is nearly every estate in the country.

The appraisal

One number decides the whole thing, so document it.

Every dollar of this turns on the date-of-death value, and nobody has a record of that number unless somebody creates one. A retrospective appraisal from a licensed appraiser, valuing the property as of the date of death, runs $400 to $700 and is the version that survives an examination. Order it within a few months, while the comparable sales are still close in time. A county assessor's value usually sits below market and costs you basis. An online estimate is not evidence of anything.

Two siblings sell their mother's house ten months after her death, 2026

What she paid for it in 1994: $95,000
Appraised fair market value on the date of death: $410,000
Sale price ten months later: $448,000
Commission and closing costs at 6.5%: $29,120
Amount realized: $418,880
Basis under §1014(a)(1): $410,000
Long-term capital gain: $8,880
Federal tax at 15%, split two ways: $666 each
Federal tax on the same sale if the basis had stayed at $95,000: $48,582

Tax year 2026. Assumes both heirs took title at death, neither one lived in the house or used it personally, each is a single filer with taxable income inside the 15% long-term capital gain band of Rev. Proc. 2025-32 ($49,450 to $545,500), and each has modified adjusted gross income under the $200,000 net investment income tax threshold. Federal income tax only. State income tax and any state inheritance tax are excluded.

Reporting

The gain is long-term even if you sell the week after the funeral.

§1223(9) treats property acquired from a decedent as held for more than one year, full stop. Sell nine days after the death and the gain is still long-term, taxed at 0%, 15%, or 20% instead of your ordinary rate. For 2026 the 15% rate starts at $49,450 of taxable income for a single filer and $98,900 for a married couple filing jointly, and 20% waits until $545,500 and $613,700, under Rev. Proc. 2025-32. Add the 3.8% net investment income tax of §1411 once modified AGI passes $200,000 single or $250,000 joint. Neither of those thresholds has ever been indexed.

The sale belongs in Part II of Form 8949 with the word INHERITED in column (b) where an acquisition date would go, then carries to Schedule D. Report it even when the gain is zero or negative. The closing agent files Form 1099-S showing gross proceeds with no basis on it, and $448,000 of unmatched proceeds is how a clean sale turns into a CP2000 notice proposing tax on the whole sale price.

Losses

A loss is deductible, unless somebody moved in.

Selling costs often outrun the appreciation since the death, which makes an inherited house a capital loss more often than people expect. That loss is deductible when the property was held for investment rather than used personally. Publication 559 says it plainly: when the personal representative intends to realize the value of the house through a sale, it is a capital asset held for investment, even though it was the decedent's home and even if it was never rented.

Move into it, let a relative stay rent free, or keep it as a weekend place, and the house becomes personal-use property under §165(c) and the loss is gone. Nothing about the gain calculation changes, so this only ever costs you on the downside. A deductible loss offsets capital gains first, then up to $3,000 of ordinary income a year under §1211(b), with the rest carried forward indefinitely under §1212(b).

The variations

Renting it, living in it, and the five states that tax the heir.

Renting the house out before you sell starts depreciation on the stepped-up basis over 27.5 years, a real deduction while you hold it and a bill when you sell. Depreciation allowed or allowable comes back as unrecaptured §1250 gain taxed at up to 25% under §1(h), whether or not you claimed it. Living in the house for two of the five years before the sale puts §121 in play instead, excluding $250,000 of gain, or $500,000 on a joint return.

A surviving spouse has better facts than anybody else here. Section 121(b)(4) keeps the full $500,000 exclusion available for a sale within two years of the spouse's death, provided the survivor hasn't remarried. And in the nine community property states, §1014(b)(6) steps up both halves of the house rather than the decedent's half, which is the double step-up that makes a survivor's sale nearly tax free in Arizona or Idaho and only half so in Utah.

Five states still charge an inheritance tax, paid by the heir rather than by the estate: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The rate turns on how you were related to the decedent. Pennsylvania runs 0% for a surviving spouse, 4.5% for children and other lineal heirs, 12% for siblings, and 15% for everyone else under 72 P.S. §9116, from the first dollar, with no exemption underneath it. Iowa's is gone for deaths on or after January 1, 2025.

The house is usually the easy part. An inherited traditional IRA gets no step-up at all, because it is income in respect of a decedent under §691, and it arrives with the 10-year rule attached. The house resets. The IRA does not.