Inherited Property Capital Gains

Under current federal tax law, when you inherit real estate, your cost basis is generally reset to the property's fair market value on the date of the original owner's death, rather than carrying over what the deceased originally paid. This means that gains which accrued during the deceased owner's lifetime, including depreciation they claimed, are generally not taxed to the heir. If you sell soon after inheriting at close to that fair market value, your taxable gain may be minimal or zero.

Because your basis steps up to fair market value at death, the depreciation the original owner claimed during their ownership generally does not carry forward as recapture exposure to you. However, once you begin renting the inherited property yourself, you start a new depreciation schedule based on your stepped-up basis, and any depreciation you personally claim going forward will be subject to recapture if you later sell at a gain.

Yes, as long as you hold the inherited property for investment or business use rather than immediately reselling it as your primary intent. If the property appreciates after you inherit it, or if you simply want to redeploy the equity into a different investment without triggering current tax on that appreciation, a 1031 exchange is available using your stepped-up basis as the starting point for calculating any gain.

Co-owned inherited property, common among siblings, can be sold jointly, partitioned, or one owner can buy out the others. If some owners want to cash out and others want to defer tax through a 1031 exchange, the ownership structure needs to be addressed before closing, since each co-owner's tax treatment depends on how their individual interest is disposed of. This is a scenario where coordinating early with your qualified intermediary and tax advisor avoids problems at the closing table.

If a formal appraisal was not obtained at the time of death, you can reconstruct fair market value using historical comparable sales data, county assessor records from that period, and, where available, a retrospective appraisal performed by a qualified appraiser. Because Seattle-area property values have moved significantly over time, having solid documentation of the date-of-death value is important both for calculating your gain accurately and for supporting your basis if the Internal Revenue Service ever asks.