Inherited Property Taxes and Financial Issues in Washington State
Inheriting a home can raise a surprising number of financial questions. What happens to the home’s tax basis? Will you owe taxes when you sell? Who pays the mortgage, property taxes, insurance, and other expenses while the estate is being settled?
Understanding inherited property taxes and the financial responsibilities that come with an inherited home can help you make better decisions about whether to sell, keep, or rent the property.
I’m Emily Cressey, a Seattle real estate broker with HomePro Associates at Keller Williams Greater Seattle. I help families throughout the Seattle area work through the real estate side of inherited property, including preparing homes for sale and evaluating their options.
If you are still getting oriented to the entire process, start with my complete guide to selling a parent’s home after death in Washington State .
What You’ll Learn About Inherited Property Taxes and Finances
This guide gives you the big picture of the tax and financial questions that often come with inheriting real estate in Washington State.
- How step-up in basis generally works for inherited property
- How federal capital gains taxes may affect an inherited home sale
- How estate sale proceeds may ultimately be distributed
- Who may be responsible for the mortgage, taxes, insurance, and other property expenses
- Financial considerations when deciding whether to sell or keep an inherited home as a rental
Understanding the Financial Side of an Inherited Home
One of the most important concepts involving inherited property taxes is the property’s tax basis. Under federal tax rules, inherited property generally receives a basis based on its fair market value at the owner’s date of death, although exceptions and alternative valuation rules can apply.
That basis becomes important when the property is eventually sold because the difference between the property’s adjusted basis and its sale price helps determine whether there is a taxable capital gain or loss.
You can verify the current rules through the IRS guidance on basis of inherited property and the Washington Department of Revenue capital gains tax guidance.
If the inherited property is still going through probate, our Washington State probate process guide explains how the estate administration and real estate pieces fit together.
Essential Guides to Inherited Property Taxes and Financial Decisions
Each guide below answers one of the most common financial questions families have when inheriting a home.
What Is Step-Up in Basis for Inherited Property?
Learn how the basis of inherited real estate is generally determined and why it can have a major impact on federal capital gains when the property is eventually sold.
Read the full guide → What Is Step-Up in Basis for Inherited Property?Do You Pay Capital Gains Tax When Selling an Inherited House in Washington?
Understand the difference between Washington’s capital gains tax and federal capital gains rules when an inherited property is sold.
Read the full guide → Capital Gains Tax on an Inherited House in WashingtonHow Are Sale Proceeds Distributed in an Estate?
Learn what generally happens to the proceeds after an estate property is sold and why debts, expenses, taxes, and estate administration may affect when heirs receive their distributions.
Read the full guide → How Are Sale Proceeds Distributed in an Estate?Who Pays the Bills, Mortgage, and Property Taxes After Death?
Understand how ongoing housing expenses are typically handled while an inherited home remains part of an estate.
Read the full guide → Who Pays the Bills, Mortgage, and Property Taxes After Death?Should You Sell or Keep an Inherited House as a Rental?
Compare selling with keeping the home as a rental, including cash flow, maintenance, taxes, management, and the opportunity cost of keeping equity tied up in the property.
Read the full guide → Should You Sell or Keep an Inherited House as a Rental?Taxes Are Only One Part of the Decision
The financially best choice is not always simply the option with the lowest tax bill. You may also need to consider the home’s condition, ongoing carrying costs, the amount of work required to manage it, the needs of other heirs, and what you could do with the equity if the property were sold.
If the house needs to be emptied, repaired, or prepared before you can make that decision, our estate cleanout and home preparation guide can help you evaluate the practical side of getting the property ready.
When several family members are involved, financial decisions can also become emotional. Our family conflict and emotional challenges guide covers communication, disagreements, and fair decision-making when settling a parent’s estate.
Making a Decision About an Inherited Home?
Taxes are an important part of the conversation, but so are property value, condition, carrying costs, and your family’s goals. Emily Cressey, Seattle Realtor with HomePro Associates, can help you understand the real estate side of your options so you have better information to discuss with your CPA and attorney.
Frequently Asked Questions About Inherited Property Taxes
Do inherited homes receive a step-up in basis?
Generally, inherited real estate receives a tax basis based on its fair market value at the owner’s date of death, although exceptions and alternative valuation rules can apply. Your CPA or estate attorney can help determine the basis that applies to your situation.
Does Washington charge capital gains tax when an inherited home is sold?
Washington State’s capital gains tax does not apply to the sale or exchange of real estate. Federal capital gains tax may still apply depending on the property’s basis, sale price, expenses, and other circumstances.
Who pays the mortgage and property taxes while an estate is being settled?
Ongoing property expenses generally still need to be paid while the estate owns the home. Which funds should be used and who is responsible for administering those payments depends on the estate and ownership structure, so confirm the details with the estate attorney or other appropriate professional.
Is it better financially to sell an inherited home or keep it as a rental?
There is no single answer. Compare expected rental income with mortgage payments, taxes, insurance, maintenance, vacancy, management costs, potential appreciation, tax consequences, and what you could do with the equity if you sold.