Tax Guides

Inherited Property Capital Gains Explained

Inherited real estate receives materially different tax treatment than property purchased directly, and understanding that difference matters for heirs weighing whether to sell or hold property located in or near Dallas, TX. Under Section 1014 of the Internal Revenue Code, an heir generally receives a stepped up basis equal to the fair market value of the property on the date of the decedent's death, rather than inheriting the decedent's original purchase price basis. This step up generally eliminates most or all of the capital gain that had accumulated during the decedent's ownership, so an heir who sells shortly after inheriting often recognizes little or no taxable gain, even if the original owner would have owed substantial tax on the same sale. If the heir instead holds the property and it continues to appreciate, gain will generally accrue from the stepped up basis forward, and a future sale of that appreciation is subject to the same general capital gains and depreciation recapture rules that apply to any other investment property, with 1031 exchange deferral available if the property is held for investment or business use at the time of a later sale. Depreciation on inherited rental property generally restarts based on the new stepped up basis. Texas has no state income tax, so any gain recognized by an heir is generally taxed only at the federal level. This page is general education, and heirs should confirm the date of death valuation and basis calculation with a tax or estate professional before making a sale decision.