Understanding Stepped-Up Basis: What to Know About Taxes When Selling an Inherited Home
One of the first questions I hear from clients who inherit a home is:
“Are we going to owe a huge amount in taxes if we sell this?”
It’s a completely fair concern. When a property has been in the family for decades, especially here in the Greater Seattle area where values have appreciated significantly, it’s easy to assume the tax bill will be overwhelming.
The good news? In many cases, it’s not as bad as people fear. And that’s often because of something called a stepped-up basis.
While every situation is unique and you should always consult your CPA or tax professional for advice specific to you, here’s a clear, high-level explanation of how this typically works.
What Is a Stepped-Up Basis?
Let’s start with the basics.
In simple terms, your “basis” is the value the IRS uses to determine potential capital gains when a property is sold.
When someone purchases a home, their basis is generally what they paid for it (plus certain improvements). Over time, if the property appreciates, that increase in value could create capital gains when sold.
However, when a property is inherited, the rules are different.
In many cases, the home’s value is adjusted — or “stepped up” — to its fair market value at the date of the original owner’s passing. That new value typically becomes the starting point for calculating future gains.
A Simple Example
Imagine parents purchased a home in 1995 for $200,000.
At the time of their passing, the home is worth $950,000.
Instead of using the original $200,000 purchase price as the basis, the value is generally adjusted to $950,000. That higher number may significantly reduce the potential taxable gain if the property is sold.
This adjustment is what often surprises heirs (in a good way).
How Capital Gains Are Typically Calculated on an Inherited Property
At a high level, capital gains are calculated like this:
Sale Price – Stepped-Up Basis (date-of-death value) = Potential Taxable Gain
If the home is sold shortly after inheritance and the sale price is close to its stepped-up value, there is often little to no taxable gain.
However, if the property increases in value after it’s inherited, or if substantial improvements are made before selling, that additional appreciation could potentially be subject to capital gains.
Because timelines, estate structures, and individual tax situations vary, this is where a CPA becomes essential.
When Taxes Might Apply
While stepped-up basis can reduce exposure, there are situations where heirs may want to have detailed conversations with their tax advisor:
The home significantly appreciated after the date of inheritance.
The property was converted into a rental.
Major renovations were completed before selling.
Multiple heirs have different financial situations.
The estate structure affects how proceeds are distributed or reported.
The specifics matter and they differ from one family to the next.
Washington State Considerations
Washington does not have a traditional state income tax, but federal capital gains rules still apply.
Additionally, Washington has its own estate tax structure, which is separate from capital gains considerations. Whether that applies depends on the size and structure of the estate.
Because tax laws evolve and estate situations can be complex, it’s important to have personalized guidance from a qualified CPA or estate professional before making decisions.
Smart Steps Before Selling an Inherited Home
Even though tax advice should come from your CPA, there are proactive steps that can help the process go more smoothly:
Obtain a professional valuation of the home close to the date of death (if one wasn’t already completed).
Keep documentation of any repairs or improvements made after inheritance.
Coordinate early between your real estate agent, CPA, and estate attorney.
Understand how timing may impact your broader financial planning.
Selling an inherited home is never just a transaction, it’s often part of a larger financial and emotional transition.
My role is to guide the real estate side strategically while working collaboratively with your financial and legal advisors so nothing falls through the cracks.
Final Thoughts
Many heirs assume they’ll be hit with overwhelming taxes when selling a long-held family home. In reality, stepped-up basis often reduces potential capital gains more than people expect.
That said, every estate and every family dynamic is different.
If you’re navigating the sale of an inherited property in the Greater Seattle or Eastside area and want clarity around your options, I’m always happy to have a conversation and help you think through the next right step or connect you with trusted estate experts. And if you’re preparing to sell and want a clearer understanding of the full estate sale process, you can read more about what to expect when selling a home through an estate sale in Washington.
Frequently Asked Questions About Selling an Inherited Home and Taxes
1. Do you have to pay capital gains when selling an inherited home?
In many cases, heirs may owe less in capital gains than expected because of the stepped-up basis rule, which generally adjusts the property’s value to its fair market value at the date of death. However, tax outcomes vary based on timing, appreciation after inheritance, and individual financial circumstances. A CPA can help determine what applies to your situation.
2. What is stepped-up basis in simple terms?
Stepped-up basis typically means that when you inherit a home, its value for tax purposes is adjusted to what it was worth at the time of the original owner’s passing — rather than what they originally paid for it. This adjustment often reduces potential capital gains if the home is sold.
3. How is the value of an inherited home determined?
The value is generally based on the property’s fair market value at the date of death. This may be established through an appraisal, comparative market analysis, or formal estate valuation, depending on the estate’s needs. A tax professional can help confirm what documentation is appropriate.
4. What happens if multiple heirs inherit a home?
When multiple heirs inherit a property, the stepped-up basis typically applies to the entire property value at the time of death. How proceeds are divided — and how taxes are handled — depends on the estate structure and each heir’s individual circumstances. Professional guidance is important in these situations.
5. Does Washington State tax the sale of inherited property?
Washington does not have a traditional state income tax, but federal capital gains rules may still apply. Washington also has a separate estate tax structure that may apply depending on the size of the estate. A qualified tax professional can clarify how these rules apply to you.
6. Does Washington have a capital gains tax on inherited property?
Washington State does not have a traditional state income tax, but it does have a state capital gains tax that applies to certain asset sales above specific thresholds. Real estate transactions are generally excluded from Washington’s capital gains tax, but federal capital gains rules may still apply. Because laws can change and exceptions exist, it’s important to confirm your specific situation with a qualified tax professional.
7. Is there Washington estate tax on inherited real estate?
Washington does have a state-level estate tax that may apply depending on the total value of the estate. This tax is separate from capital gains tax and is typically handled at the estate level before assets are distributed to heirs. Whether it applies depends on the size and structure of the estate, so working with an estate attorney or CPA is essential.
8. Can you sell an inherited house during probate in Washington?
In many cases, inherited property in Washington can be sold during probate, but the process depends on whether the executor has full authority (often called non-intervention powers) or if court approval is required. The timeline and documentation vary based on the estate structure. A real estate professional experienced in probate sales can help coordinate with the estate’s legal team.
Disclaimer
This article is for general informational purposes only and is not intended as tax or legal advice. Tax laws and individual circumstances vary. Always consult with a qualified CPA, tax professional, or estate attorney regarding your specific situation before making financial decisions.
MEET VERONICA
As a Washington native, Kirkland expert, and award-winning agent, Veronica Morss brings unmatched local insight and a client-first mindset to every real estate transaction. With a proven track record in multimillion-dollar negotiations, she blends deep neighborhood knowledge with the latest marketing strategies to help buyers, sellers, and investors succeed across the competitive Greater Seattle market. Supported by eXp Realty’s global reach, Veronica combines hyper-local expertise with world-class resources to deliver exceptional results, especially within the luxury segment. Her commitment to creative solutions, cutting edge strategy, and white glove service makes her a trusted advisor throughout every stage of the real estate journey.
Veronica Morss, Real Estate Broker
206-853-3491