Selling a house inherited from a parent in Bethpage or a rental property left by an aunt in Riverhead usually creates far less tax than people expect, because of one rule that changes the entire calculation: stepped-up basis. It's the reason an heir can sell a property their parents bought for 60,000 dollars in 1975 and owe little or no federal capital gains tax, even though the sale price is now well into seven figures.
How Stepped-Up Basis Actually Works
When someone inherits property, their basis generally resets to the property's fair market value on the date of the original owner's death, not the amount the deceased originally paid. That means decades of appreciation that happened before the inheritance simply disappears from the tax calculation. Gain going forward is measured only against that new, stepped-up value, so if the property is sold relatively soon after inheritance at close to its appraised value, the taxable gain can be small or nonexistent.
Getting the Date-of-Death Value Right
The stepped-up basis depends entirely on an accurate valuation as of the date of death, which usually means a formal appraisal rather than a rough guess or an old tax assessment. On Long Island, where home values have moved substantially in some neighborhoods over just a few years, an appraisal done six months after death can already look outdated by the time the property actually sells, which is one more reason to get a qualified appraisal close to the date of death rather than reconstructing a value later from memory or old listings.
When Multiple Heirs Are Involved
A property left to several siblings is typically held as tenants in common, with each heir's basis and gain calculated on their proportional share. If one sibling wants to sell and another wants to keep the property, that disagreement has to be resolved, sometimes through a buyout, before a sale can move forward cleanly. Gain or loss is tracked separately for each heir's share, so one sibling could owe tax while another doesn't, depending on what each does with their proceeds and whether an exchange is used.
If the Property Was Rented Before or After the Inheritance
An inherited property that the heirs rent out before selling starts accumulating its own depreciation from the stepped-up basis forward, and that new depreciation is subject to recapture at sale just like any other rental. Heirs who want to keep the real estate working for them rather than cashing out sometimes use a 1031 exchange on their inherited share to move into a different property, whether that's another Long Island asset or a passive DST allocation, deferring gain on any appreciation that happens after the date of death.
Common 1031 Exchange Questions
Do you owe capital gains tax if you sell an inherited house right away?
Often very little or none, because your basis steps up to the property's fair market value on the date of death. If you sell close to that value shortly after inheriting, there's usually little taxable gain, though a formal appraisal is what supports that number.
What if we don't have a professional appraisal from when the person died?
It's worth getting one retroactively if possible, since the IRS expects a documented, defensible date-of-death value. Without it, you're relying on estimates that may not hold up if the return is ever questioned.
you and your sister inherited a house together and she wants to keep renting it. Do you owe tax if you sell your share?
Your share is treated separately from hers for tax purposes. If you sell your interest, gain or loss is calculated on your portion of the stepped-up basis, regardless of what she decides to do with her share. A buyout, where she purchases your interest instead of the property going to an outside buyer, is handled the same way for tax purposes as a sale to anyone else.
Can you do a 1031 exchange with an inherited property?
Yes, if the property is held for investment or business use rather than as your personal residence. The exchange would apply to appreciation from the stepped-up basis forward, not to the years the original owner held the property.
Does New York have a separate inheritance tax on top of this?
New York has an estate tax that applies at the estate level based on the size of the whole estate, which is separate from the capital gains tax calculation on an individual sale. Your estate attorney can clarify whether the estate itself owed any tax before distribution.
