When you inherit a house or property, one of the first questions you’ll face is: how much will I owe in taxes if I sell it? The answer depends on something called “cost basis.” Understanding this concept can save you thousands of dollars and help you make smart choices about your inherited property.

Most people who inherit property in Lincoln, NE, and across the country don’t realize they get a huge tax advantage. The IRS uses a special rule called “step-up in basis” for inherited assets. This rule can dramatically reduce or even eliminate the taxes you owe when you sell.

In this guide, we’ll walk through exactly how to calculate your tax basis. We’ll explain which numbers you need to find, how to adjust them properly, and when to seek professional help. Whether you plan to keep the property, rent it out, or sell it quickly, knowing your tax basis is the foundation of making the right financial decision.

What Is Cost Basis and Why Does It Matter?

Cost basis is the original value of an asset for tax purposes. When you sell something, the IRS wants to know how much profit you made. To figure that out, you subtract the cost basis from the selling price. The difference is your capital gain, and that’s what gets taxed.

Here’s a simple example. If you buy a house for $100,000 and sell it for $150,000, your capital gain is $50,000. That $100,000 purchase price is your cost basis.

But inherited property works differently. You didn’t buy it, so there’s no purchase price to use as your basis. Instead, the IRS uses the property’s fair market value as of the date the previous owner died. This is called a “step-up in basis,” and it’s one of the biggest tax breaks in the tax code.

Let’s say your grandmother bought her house in 1980 for $40,000. When she passed away in 2024, the house was worth $200,000. If you inherit it and sell it for $205,000, you only pay tax on $5,000 of gain, not $165,000. The basis “steps up” from her original purchase price to the value at the time of her death.

This step-up rule exists because the law wants to avoid taxing the same gain twice. It recognizes that the property has already appreciated during the original owner’s lifetime. By resetting the basis at death, you only pay tax on gains that happen after you inherit.

Understanding your cost basis matters for several reasons. First, it determines how much tax you’ll owe when you sell. Second, it affects whether you should sell now or wait. Third, it helps you decide if selling to a company like Sell To How makes financial sense compared to listing with a real estate agent.

Many people rush to sell inherited property without first calculating their basis. They assume they’ll owe huge taxes and make decisions based on fear. In reality, the step-up in basis often means they’ll owe little or no tax at all.

How to Find the Fair Market Value at Date of Death

The most important number when calculating your tax basis is the fair market value as of the date of death. This becomes your starting point for all tax calculations. But finding this value takes some work.

Fair market value means the price a willing buyer would pay a willing seller when both know all the facts, and neither is forced to act. It’s what the property would sell for in a normal transaction on that specific date.

The first place to look is the estate documents. If the property went through probate, the executor likely had it appraised. Estate tax returns (Form 706) also include property valuations. These official appraisals are usually the best evidence of fair market value.

If no formal appraisal exists, you have several options. You can hire a professional appraiser to provide a “retrospective appraisal.” This appraisal, completed today, estimates the property’s value on a past date. Appraisers do this by looking at comparable sales from around that time and adjusting for market changes.

Real estate agents can also help. Many agents will provide a comparative market analysis (CMA) for free, hoping you’ll use them when you sell. A CMA looks at similar properties that sold near the date of death and estimates value based on those sales.

Tax assessor records offer another data point. The county assessed value isn’t the same as fair market value, but it can give you a ballpark figure. In Lancaster County, where Lincoln is located, you can find these records online.

Online tools like Zillow or Realtor.com show estimated values, but use these carefully. Their algorithms can be off by thousands of dollars. They’re better as a starting point than as your final answer.

Whichever method you use, document everything. Keep copies of appraisals, CMAs, comparable sales, and any other evidence. The IRS can challenge your cost basis if you’re audited, so keeping good records protects you.

Timing matters too. Most people use the date-of-death value, but there’s an alternative valuation date option. Executors can instead choose to value the entire estate six months after death. This applies only if it was elected on the estate tax return, and it must be used for all estate assets, not just real estate.

Adjusting Your Basis for Improvements and Expenses

Your initial basis is the fair market value at death, but that’s not the end of the story. You can adjust your basis upward by adding certain costs and improvements. These adjustments reduce your taxable gain when you sell.

Capital improvements increase your basis. These are upgrades that add value to the property, extend its useful life, or adapt it to new uses. Examples include a new roof, an HVAC system, a kitchen remodel, or an addition. Regular repairs and maintenance don’t count, only substantial improvements.

Let’s say you inherit a house with a basis of $200,000. Before selling, you spend $15,000 on a roof replacement and $10,000 on a kitchen update. Your adjusted basis becomes $225,000. If you sell for $230,000, your taxable gain is only $5,000 instead of $30,000.

Selling expenses also reduce your gain, though technically they’re not basis adjustments. These costs get subtracted from your sale proceeds. Selling expenses include real estate commissions, title insurance, attorney fees, recording fees, and transfer taxes. If you spent $15,000 on selling costs, that comes right off the top of your sale price.

Some costs related to inheriting the property might be deductible, but they don’t adjust the basis. Probate fees, estate administration costs, and funeral expenses generally can’t be added to your property basis. These are estate expenses, not property expenses.

Keep detailed records of all improvements and costs. Save receipts, invoices, canceled checks, and contracts. Take before-and-after photos of major projects. If you’re questioned later, you’ll need to prove what you spent and that the work qualified as an improvement.

Not every dollar you spend increases basis. Painting, minor repairs, and routine maintenance keep the property in good condition but don’t add lasting value. The IRS distinguishes between repairs (which maintain the current condition) and improvements (which make something better than it was).

One strategy used by some heirs is to make improvements before selling to increase basis and reduce taxes. However, be realistic about whether you’ll recoup the cost. In a slow market or if the property needs major work, selling as-is to a company like Sell To How might make more financial sense than pouring money into improvements.

Working With a Tax Professional on Inherited Property

Calculating the tax basis of inherited property can get complicated fast. While many situations are straightforward, others involve nuances that require expert help. Knowing when to hire a tax professional can save you money and stress.

A certified public accountant (CPA) or enrolled agent specializes in tax matters. They understand the rules around inherited property and can ensure you calculate everything correctly. The cost of their service is usually far less than the mistakes you might make trying to handle complex situations alone.

You definitely need professional help if the estate was large enough to require an estate tax return. Estate tax rules interact with income tax rules in ways that aren’t obvious. A professional can navigate these waters and optimize your tax position.

Multiple heirs make things more complex. If you inherited property with siblings or other family members, each person’s basis needs to be calculated separately. A tax pro can ensure everyone gets the right numbers and avoid family disputes over tax responsibility.

Properties with unclear ownership history, missing documents, or complicated family situations also call for professional guidance. If you can’t find good records of the date of death value, a tax advisor can help you establish a defensible basis using the best available evidence.

Out-of-state property creates additional complexity. You might face taxes in multiple states, and the rules vary widely. Nebraska has its own tax laws, but if the property is in another state, you’ll need to understand both jurisdictions.

Tax professionals can also help with planning. If you’re deciding whether to sell now or later, they can model different scenarios. They’ll consider factors such as capital gains rates, holding periods, depreciation recapture (for rental properties), and state taxes.

The fee for tax advice varies. Simple consultations might cost $200 to $500. More complex situations involving detailed analysis and tax return preparation can run $1,000 to $3,000 or more. Ask for a clear fee quote upfront.

Don’t confuse a tax professional with a real estate agent or attorney. Each has a different expertise. An agent knows market values and sales strategies. An attorney handles legal title and estate issues. A tax pro focuses specifically on minimizing your tax burden. For inherited property, you might need all three.

When choosing a tax advisor, look for someone with specific experience in inherited property and real estate taxation. Ask about their credentials and how many inherited property cases they handle each year. The right professional becomes a valuable partner in managing your inheritance wisely.

If you’re selling inherited property in Lincoln, NE, companies like Sell To How understand these tax implications. They can work with your timeline and help you structure a sale that makes sense given your tax situation. A cash sale often closes faster and with fewer complications than a traditional listing, which matters when you’re trying to settle an estate efficiently.

Frequently Asked Questions

Do I have to pay capital gains tax on inherited property if I sell it right away?

Not necessarily. If you sell the inherited property shortly after inheriting it, your sale price will likely be very close to the stepped-up basis (the value at the date of death). This means little or no gain to report. For example, if the property was worth $180,000 when you inherited it, and you sell it three months later for $182,000, you only have a $2,000 gain. However, if you wait several years and the property appreciates significantly, you’ll owe tax on that additional appreciation. The key is the difference between your selling price and the date-of-death value, not the original owner’s purchase price.

Can I claim the home sale exclusion on inherited property?

Yes, but only if the inherited property becomes your primary residence and you meet the normal requirements. The home sale exclusion lets you exclude up to $250,000 of gain ($500,000 for married couples filing jointly) if you lived in the home as your main residence for at least two of the five years before selling. This applies to inherited homes just like any other property. If you inherit a house, move in, live there for 2 years, and then sell, you can use this exclusion. However, most people who inherit property don’t move into it, so they can’t claim this benefit.

What records do I need to keep for inherited property taxes?

Keep the death certificate, estate documents showing the date of death value (like appraisals or probate records), and Form 706 if one was filed. Also, save all receipts for improvements you make, including contractor invoices, material receipts, and permit records. Keep closing documents from when you sell, showing all costs and fees. Store these records for at least 3 years after filing the tax return reporting the sale, though keeping them longer is smart. Digital copies work fine, so scan paper documents and save them in a secure location. Good records protect you if the IRS ever questions your basis calculation.