Getting a home from someone who has passed away can feel overwhelming. You have to deal with grief and paperwork at the same time. On top of that, you might owe taxes when you sell the property. The good news? You can use legal strategies to lower or even eliminate capital gains tax on inherited property.

This guide will show you seven ways to keep more money in your pocket when selling an inherited home. We’ll explain each strategy in simple terms so you can make smart choices.

Understanding Tax on Selling Inherited Property

Before we dive into strategies, let’s clear up what taxes you might face. When you inherit property, you usually get a big tax break called a “step-up in basis.” This means the property’s value resets to its value on the date the person died.

Here’s an example. Say your aunt bought her house in 1990 for $50,000. When she passed away in 2024, the house was worth $250,000. You inherit it. Your starting point for taxes (your basis) is $250,000, not $50,000. That’s huge.

If you sell the house right away for $250,000, you owe zero capital gains tax. You only pay capital gains tax on the profit above your stepped-up basis. So if the house value goes up to $280,000 before you sell, you’d only owe tax on the $30,000 gain.

Capital gains tax rates depend on how long you own the property and your income level. Short-term gains (property held for less than one year) are taxed as ordinary income. Long-term gains (over one year) have lower rates, usually 0%, 15%, or 20%.

Now, let’s look at how to minimize these taxes legally.

Sell Quickly to Minimize Appreciation

The fastest way to avoid capital gains tax is to sell the inherited property soon after you inherit it. Remember that step-up in basis? It freezes the property value at the date of death. Every day you wait, the property might increase in value. That increase becomes taxable profit.

Let’s say you inherited a home valued at $200,000. You wait two years to sell it. During that time, the local real estate market heats up. You sell for $240,000. You now owe capital gains tax on $40,000 of profit.

If you had sold within a few months of inheriting the property, you might have sold for $205,000 instead. Your taxable gain would only be $5,000. That’s a big difference.

Selling quickly has other benefits, too. You won’t have to pay for property taxes, insurance, utilities, and maintenance while the house sits empty. These costs add up fast. In Lincoln, NE, property taxes and upkeep can cost thousands per year.

If you need to sell fast, companies like Sell To How buy houses for cash in Lincoln. They can close in days instead of months. You skip repairs, showings, and realtor commissions. This speed helps you avoid market appreciation and holding costs.

Some people worry about making rushed decisions. But if you don’t plan to live in the home or rent it out, waiting rarely helps. Property markets can go down, too, but appreciation is the bigger tax risk in most cases.

Use the Property as Your Primary Residence

Moving into an inherited home can unlock a massive tax exemption. The IRS lets you exclude up to $250,000 of capital gains if you’re single, or $500,000 if you’re married. To qualify, you must live in the home as your main residence for at least two of the five years before selling.

This strategy works best if you are planning to move anyway or if the inherited property is nicer than your current home. You turn a tax problem into a housing solution.

Here’s how it works. You inherit a house worth $300,000. You move in and live there for two years. During that time, the property value rises to $400,000. You sell it and make a $100,000 profit. If you’re single, that entire $100,000 gain is tax-free because it’s under the $250,000 exclusion limit.

You can combine this exclusion with your stepped-up basis. Let’s say your uncle bought his home for $100,000 many years ago. It was worth $300,000 when he died. You inherit it with a stepped-up basis of $300,000. You live there for three years, and it appreciates to $500,000. Your gain is $200,000. As a single person, you’d pay no tax on the first $250,000. So you owe zero capital gains tax.

This strategy takes patience. You need to actually live in the home for two years, not just own it. But the tax savings can be worth it, especially with expensive properties.

Keep good records. Save utility bills, voter registration, driver’s license updates, and other proof you lived there. The IRS may ask for documentation.

Consider a 1031 Exchange for Investment Property

A 1031 exchange lets you swap one investment property for another without paying capital gains tax right away. You defer the tax until you sell the replacement property. This strategy only works for investment or business properties, not personal homes.

If you inherit a rental property or plan to rent out the inherited home, a 1031 exchange could save you thousands. The rules are strict, but the benefits are real.

Here’s the basic process. You sell your inherited property. Within 45 days, you must identify up to three potential replacement properties. Then you have 180 days total to close on one of those properties. All the money from your sale must go through a qualified intermediary (a neutral third party). You cannot touch the cash yourself.

The replacement property must be equal to or greater in value. If you sell for $300,000, you need to buy something worth at least $300,000. If you buy something cheaper, you’ll pay tax on the difference.

1031 exchanges work great for building wealth through real estate. Instead of paying a big tax bill, you roll your money into a better property. You might upgrade from a single rental home to a small apartment building. Or you could move from an out-of-state property to something local in Lincoln that’s easier to manage.

The downside? 1031 exchanges are complicated. You need a qualified intermediary and possibly a tax attorney. The deadlines are firm. Miss them by even one day, and the whole deal falls apart. You’ll owe all the taxes you tried to defer.

This strategy makes sense if you want to stay in real estate investing. If you just want cash from the sale, a 1031 exchange won’t help.

Timing Your Sale to Reduce Your Tax Bracket

When you sell, it matters just as much as how you sell. Your capital gains tax rate depends on your total income for the year. By timing the sale carefully, you might drop into a lower tax bracket and pay less.

Long-term capital gains are taxed at three federal tax rates: 0%, 15%, and 20%. Your rate depends on your taxable income. For 2024, single filers with income under $44,625 pay 0% on long-term gains. For married couples filing jointly, that threshold is $89,250.

Let’s say you’re single and usually make $40,000 per year. You inherit property and sell it for a $30,000 gain. If you sell in a year when you’re working full-time, your total income might be $70,000. You’d pay 15% on that gain, or $4,500 in tax.

But what if you wait until you retire or take a sabbatical? Next year you may earn $20,000. Add the $30,000 gain, and your total is $50,000. Part of your gain might qualify for the 0% rate. You’d pay much less tax, possibly zero on the first portion.

You can also spread the sale across tax years using an installment sale. Instead of getting all the money at once, you receive payments over time. Each year, you only pay tax on the portion you received. This keeps your income from spiking in one year.

Timing strategies require planning. You need to review your income for the current year and project it for future years. A tax professional can help you model different scenarios.

One warning: don’t let tax planning make you miss a good market. If home prices are about to drop, it’s better to sell now and pay some tax than to wait and lose value.

Take Advantage of Cost Basis Additions

You can increase your cost basis by adding certain expenses. A higher basis means less taxable profit. Many people forget about this strategy and pay more tax than necessary.

What expenses can you add? Improvements you make to the property before selling count. Improvements are different from repairs. A repair keeps the property in good condition (like fixing a leaky faucet). An improvement adds value (like adding a new bathroom).

Examples of improvements include: new roof, kitchen remodel, adding central air conditioning, finishing a basement, building a deck, new windows, or landscaping work.

Selling costs also increase your basis. These include realtor commissions, title insurance, legal fees, transfer taxes, and advertising costs. If you pay a commission of 6% on a $200,000 sale, that’s $12,000 you can subtract from your gain.

Keep every receipt and invoice. Take photos of work being done. These records prove your expenses if the IRS ever questions your tax return.

Here’s an example. You inherit a home valued at $150,000 (your stepped-up basis). You spend $20,000 on a new roof and kitchen updates. Your selling costs are $15,000. Your adjusted basis is now $185,000. If you sell for $200,000, your taxable gain is only $15,000 instead of $50,000.

This strategy works best when you’re already planning improvements to help the house sell. Don’t make expensive upgrades just for tax reasons. Make sure the improvements will actually increase the selling price enough to be worth it.

Offset Gains with Capital Losses

If you have investment losses from stocks, bonds, or other property sales, you can use them to offset your capital gains. This strategy is called tax-loss harvesting.

The IRS lets you subtract capital losses from capital gains. If your losses exceed your gains, you can deduct up to $3,000 per year from your regular income. Any remaining losses carry forward to future years.

Let’s say you inherited a house and will have a $40,000 capital gain when you sell. You also own stocks that have dropped in value. If you sell those stocks at a $40,000 loss in the same year, your gains and losses cancel out. You owe zero capital gains tax.

This strategy requires you to have other underwater investments. It doesn’t make sense to sell good investments just to avoid tax on inherited property. But if you were already planning to sell losing investments, timing them with your property sale is smart.

You can’t use personal losses, like selling your car for less than you paid for it. Only investment and business property losses count.

Keep in mind the “wash sale” rule. If you sell a stock at a loss and buy the same stock back within 30 days, the IRS doesn’t allow you to claim the loss. You actually have to exit the position for at least a month.

This strategy works best if you actively manage investments. Talk to a financial advisor who can review your entire portfolio and plan the timing.

Donate the Property to Charity

If you care about a cause and don’t need the money from the sale, donating inherited property to charity eliminates capital gains tax. You also get a charitable deduction equal to the property’s fair market value.

This strategy makes sense if the property will generate a large tax bill and you’re charitable-minded anyway. You turn a tax problem into a way to support something you believe in.

Many charities accept real estate donations. National organizations like Habitat for Humanity take donated homes. Local nonprofits might accept property, too. Some charities will even handle selling the property themselves.

Before donating, get an independent appraisal. The IRS requires this for property donations over $5,000. The appraisal determines your deduction amount. Donate a property appraised at $300,000, and you can deduct $300,000 from your income (subject to certain limits based on your adjusted gross income).

You can spread the deduction over several years if it’s very large. Current tax law lets you deduct charitable contributions up to 30% of your adjusted gross income for property donations. If your deduction exceeds that, you carry the excess forward for up to five years.

One creative option is to donate only part of the property. You could keep a life estate (the right to live there) and donate the remainder interest to charity. This gives you a current tax deduction as long as you continue to use the property.

Donating property is permanent. Make sure you truly want to give up that asset. If you need the income, other strategies on this list will serve you better.

Working with Sell To How in Lincoln, NE

Sometimes the best strategy is simplicity. If you want to avoid the hassle of listing, repairs, and months of uncertainty, selling to a cash buyer makes sense. That’s where Sell To How comes in.

Sell To How buys houses directly in Lincoln, NE. You skip realtor commissions (often 6% of the sale price). You avoid repair costs that can run into thousands. You close fast, often in just seven days. This speed helps you sell near your stepped-up basis before appreciation creates a tax problem.

Cash buyers offer convenience when you’re dealing with an inherited property. Maybe you live out of state and can’t easily manage the property. Maybe the house needs work you can’t afford. Maybe you just want to move on and settle the estate quickly.

Getting an offer is free and creates no obligation. Sell To How looks at your property and makes a fair cash offer. You decide if it works for you. If you accept, they handle most of the closing costs and paperwork.

This option pairs well with several strategies we discussed. Selling quickly minimizes appreciation. Getting cash fast means you can invest in a replacement property for a 1031 exchange. Or you can use the proceeds to offset other capital losses that same tax year.

Every inherited property situation is different. Take time to understand your options. Talk to a CPA or tax attorney about your specific circumstances. The strategies in this guide are legal and proven, but the right choice depends on your goals, timeline, and financial situation.

Frequently Asked Questions

Do I have to pay inheritance tax on property in Nebraska?

Nebraska no longer has an inheritance tax. The state eliminated it in 2024. However, you may still owe federal capital gains tax when you sell the property. The step-up in basis usually protects you from tax on the property’s appreciation before you inherited it. You only pay capital gains tax on any increase in value that happens after you inherit the home. If you sell quickly, your tax bill might be very small or even zero.

What happens if multiple people inherit the same property?

When siblings or other relatives inherit property together, each person receives a stepped-up basis based on their ownership share. If three siblings each own one-third of the property, and the property was worth $300,000 at death, each sibling has a $100,000 basis. When you sell, each person reports their share of the gain on their own tax return. Agree as a group on timing and strategy. All co-owners must agree on strategies such as the primary residence exemption or a 1031 exchange. Communication prevents problems later.

Can I rent out the inherited property without paying capital gains tax?

Renting out inherited property doesn’t trigger capital gains tax because you’re not selling. You’ll pay regular income tax on the rental income you collect. Capital gains only matter when you eventually sell the property. Renting can be smart if the property generates good income and you want to build wealth through real estate. Just remember that when you do sell later, you might owe depreciation recapture tax in addition to capital gains tax. The property will have appreciated more by then, too. Renting works best as a long-term strategy, not a way to delay a sale you’ll make soon anyway.