Inherited Property Capital Gains

Inherited property receives a stepped up basis under Internal Revenue Code Section 1014, meaning the heir's basis becomes the fair market value of the property on the date of the decedent's death, rather than the amount the decedent originally paid. This rule eliminates the capital gain that accumulated during the decedent's ownership, which is why heirs who sell inherited property shortly after receiving it often owe little or no capital gains tax, even if the original owner held the property for decades and it appreciated substantially.

The stepped up basis benefit only covers appreciation that occurred before the date of death. If an heir holds the inherited property and it continues to appreciate after the date of death, that additional appreciation is taxable when the property is eventually sold, calculated against the stepped up basis rather than the original purchase price. Orange County heirs who inherit rental or investment property and hold it for several years before selling can accumulate a meaningful new gain on top of the stepped up basis, particularly in appreciating submarkets like Irvine and Costa Mesa.

A Section 1031 exchange remains available to heirs on the post-inheritance appreciation, provided the inherited property was held for investment or business use rather than personal use. Because the stepped up basis already erased the original owner's gain, an heir exchanging shortly after inheritance typically has a smaller amount of gain to defer than the decedent would have. Heirs planning to sell or exchange inherited property should obtain a qualified appraisal establishing the date of death value promptly after inheritance, since that value becomes the basis for all future gain calculations.