Selling an Inherited House: Taxes, Siblings and the Step-Up Rule

An inherited house arrives with grief, paperwork and usually a sibling. The single most valuable thing to understand early is that the tax position is probably much better than you fear, and the family position is probably the hard part.

The step-up in basis, which most people do not know about

When you inherit property in the United States, its cost basis is generally reset to its fair market value on the date of death. If your parents bought the house for $40,000 in 1978 and it was worth $310,000 when they died, your basis is roughly $310,000, not $40,000.

Sell it soon afterwards for $315,000 and the taxable gain is around $5,000, not $275,000. Most people who sell an inherited house within a year or two of the death owe little or no capital gains tax. This is general information rather than tax advice; confirm it with a CPA who can see the actual numbers, because state rules and community property rules vary.

Two practical consequences follow. First, get a date-of-death valuation. A formal appraisal establishing that number is cheap and it is the document the whole calculation rests on. Second, waiting years to sell reintroduces gains, because appreciation after the date of death is taxable in the ordinary way.

You probably cannot sell yet

If the house was not in a living trust and did not pass by transfer-on-death deed or joint tenancy, it must go through probate before it can be sold. Timelines vary from about two months in a simple state to a year or more where the estate is contested. A cash buyer can normally go under contract while probate runs and close when the court permits, which is why so many inherited houses sell this way.

The part that actually goes wrong: siblings

Three heirs, one house, three different answers. One wants to keep it, one needs the money now, one lives 2,000 miles away and just wants it over.

• Agree on the process before you argue about the number. "We will get two independent valuations and take the average" ends more disputes than any amount of discussion about what the house is worth.
• One heir buying the others out requires a real valuation and usually a refinance. Get it appraised properly; family discounts are where lasting resentment comes from.
• If you truly deadlock, any co-owner can generally file a partition action forcing a court-ordered sale. It is slow, expensive and it ends relationships. It is the worst outcome and its existence is the best reason to compromise.

What it costs to hold it while you decide

An empty inherited house costs real money every month: property taxes, insurance (often at a higher vacant-property rate, and standard policies frequently lapse on vacancy), utilities kept on to prevent freezing and mould, lawn care, and the risk of a break-in. Six months of indecision on a modest house routinely costs several thousand dollars plus a deterioration in condition.

Practical order of operations

1. Find the will or trust, and find out whether probate is needed.
2. Get a date-of-death appraisal. Do this early, it gets harder later.
3. Tell the insurer the house is vacant. A lapsed policy on an empty house is a catastrophe waiting.
4. Agree the process with every heir, in writing, before valuing anything.
5. Get both a market opinion from an agent and a cash offer, then choose with real numbers in front of you.

Related: selling a house in probate and selling as-is, which is what most inherited houses end up doing.