What Is Step-Up in Basis for Inherited Property?
If you inherited a parent’s home, step-up in basis may be one of the most important tax concepts to understand before deciding whether to sell.
In simple terms, the tax basis of inherited property is generally based on the property’s fair market value when the owner dies, rather than what your parent originally paid for the property. This can make a significant difference when calculating a potential capital gain after an inherited home is sold.
This article is part of our guide to inherited property taxes and financial issues in Washington State . If you are working through the entire process of handling and selling a parent’s home, you can also start with our complete Washington guide to selling a parent’s home after death .
How Does Step-Up in Basis Work?
Imagine your parents purchased their Seattle home decades ago for $150,000. By the time the surviving parent dies, the home has a fair market value of $800,000.
Original purchase price: $150,000
Fair market value at death: $800,000
Potential inherited basis: $800,000
If the property later sells for $820,000, you generally would not calculate the gain by simply subtracting the original $150,000 purchase price from the sale price. Instead, the inherited property’s basis would generally start with its value at death, subject to applicable tax rules and adjustments.
That is why step-up in basis can have such a large impact on families who inherit homes that have appreciated substantially over many years.
How Do You Determine the Home’s Date-of-Death Value?
Because fair market value can affect the step-up in basis, documenting the property’s value around the date of death can be important.
Depending on the estate and advice from your tax or legal professional, documentation may include:
- A qualified appraisal
- Comparable home sales around the date of death
- Estate tax valuation documents, when applicable
- Other professional valuation evidence
This can become especially important if the home is not sold until months or years later and its value changes substantially.
For current federal guidance, review the IRS information on the basis of inherited property .
Why Step-Up in Basis Matters When You Sell
Your basis is one of the numbers used to determine whether selling inherited property results in a taxable gain or loss.
This is also why two heirs selling similarly priced homes could have very different tax results. The sale price alone does not tell you how much taxable gain there may be.
Our related guide explains whether you pay capital gains tax when selling an inherited house in Washington and how the stepped-up basis fits into that calculation.
Does Every Inherited Property Get the Same Step-Up?
No. Although fair market value at death is the general federal rule for inherited property, there are exceptions. An estate may also qualify for or elect different valuation treatment in certain circumstances.
Step-Up in Basis FAQs
What does step-up in basis mean?
It is a commonly used term describing how the basis of inherited property is generally determined using its fair market value at the owner’s death rather than simply carrying over what the deceased owner originally paid.
What if the house goes down in value after I inherit it?
The property’s later sale price does not retroactively change its date-of-death value. A subsequent increase or decrease in value may affect the gain or loss calculated when the property is sold.
Do I need an appraisal for step-up in basis?
An appraisal can provide useful documentation of fair market value, but the appropriate valuation and documentation depend on the estate and tax circumstances. Ask the estate’s CPA or attorney what documentation is appropriate.
Does step-up in basis mean I will owe no capital gains tax?
Not necessarily. The eventual tax result depends on the property’s correct basis, sale price, allowable adjustments, selling expenses, and other circumstances.
Understanding the Numbers Before You Sell
If you are deciding what to do with an inherited home, understanding step-up in basis is only one part of the financial picture. Property value, selling costs, ongoing expenses, and your family’s plans all matter too.
You may also want to review how estate sale proceeds are distributed and who pays the mortgage, property taxes, and other bills after death to understand the broader financial picture.
Emily Cressey, Seattle Realtor with HomePro Associates at Keller Williams Greater Seattle, can help you evaluate the real estate side of an inherited property, including its current market value and potential selling options. Contact Emily to talk through the property and your timeline.