# What Happens Tax-Wise When You Inherit a House
Inheriting a house triggers a complex web of tax consequences that most beneficiaries don't anticipate. The IRS and your state each impose different rules, and mistakes can cost you thousands in unnecessary taxes or missed deductions.
Here's what actually happens when you inherit property.
## The Stepped-Up Basis Rule Changes Everything
The single biggest tax break for inheritors is the stepped-up basis. When someone dies and leaves you their home, the IRS automatically resets the property's tax basis to its fair market value on the date of death, not what the original owner paid for it.
Example: Your parents bought their house in 1985 for $150,000. It's worth $800,000 when they die. Your new tax basis becomes $800,000. If you sell immediately, you owe zero capital gains tax. If you hold it and later sell for $850,000, you only pay capital gains tax on the $50,000 gain, not on the $650,000 appreciation that happened during your parents' lifetimes.
This rule saves inheritors enormous amounts of money, but it only applies to property you inherit. It does not apply to property transferred by gift while the owner lives. This distinction matters hugely for tax planning.
## State Inheritance and Estate Taxes
Some states impose their own inheritance or estate taxes on inherited property, separate from federal rules. Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania charge inheritance taxes ranging from 1% to 16%, depending on your relationship to the deceased and the property value.
Six other states including Connecticut, Delaware, Hawaii, Illinois, Maine, and Massachusetts charge estate taxes that apply before assets are distributed. The federal estate tax applies only to estates over $13.61 million (2024), so most Americans skip this concern entirely.
Check your state's specific rules. Your location and the deceased person's location both matter.
## Income Tax on Rental Property or Depreciation Recapture
If the inherited home was a rental property or investment property, depreciation recapture rules apply. The stepped-up basis resets the depreciation schedule, which saves you from recapture tax on pre-death depreciation. However, depreciation you claim after inheriting the property remains taxable later when you sell.
If the home was your parents' second home they rented out for years, consult a tax professional before claiming depreciation on your inherited interest.
## Selling Within One Year
Many inheritors sell the inherited property within a year. The stepped-up basis handles capital gains tax beautifully. You typically owe nothing if you sell near the appraised value from the date of death.
Your main costs are realtor commissions (usually 5-6%), closing costs, and any state transfer taxes. Some states charge transfer taxes on inherited properties. New York charges 1% to 13% depending on property value. Florida charges nothing.
## Living in the Inherited Home
If you plan to live in the inherited home as your primary residence, you may later claim the $250,000 (or $500,000 for married couples) capital gains exclusion when you eventually sell. You must have owned and lived in the home for at least two of the five years before selling.
The stepped-up basis usually handles enough of the gain that you won't hit this ceiling anyway, but it exists as an extra layer of protection.
Talk to a tax professional in your state before making decisions about an inherited property. The stepped-up basis is powerful, but state rules vary enough that one consultation now prevents costly mistakes later.