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Avoid Paying Capital Gains Tax on Inherited Property

You can inherit a house or any other property, which can significantly increase its value and subject you to greater taxes. If the house you inherited has increased in value since you received it, you might be required to pay capital gains tax when you sell it.

Nevertheless, most people who inherit properties must learn how to avoid paying capital gains tax on inherited property. While most people find the process complicated, the truth remains that you must understand how it works and use it to your advantage. This article will guide you to take the necessary steps to avoid capital gains tax on inherited property. 

Understanding the Basics of Capital Gains Tax on Inherited Property 

Understanding the basics of Captial Gains

The sale of a capital asset generates profit. Capital gains tax refers to any profit made on selling these capital assets. Real estate, investments like stocks or bonds, or even automobiles are examples of capital assets. To calculate the tax, you must subtract the asset’s sale price from its cost basis, the asset’s original acquisition price.

The asset condition, the taxpayer’s income level, and several other variables can affect the capital gains tax rates. On inherited property, taxes are not usually due. Only a small portion of assets, typically only when a sizable sum of money is transferred, are subject to inheritance or estate taxes.

Factors to Consider When Calculating Capital Gains Tax

Factors to Consider

When determining the potential capital gains tax you would owe on the inherited property, you should consider the following:

Property Tax basis

The cost of the home at the time of purchase is not your tax basis. It is the property’s fair market value, either on the day you inherit it or on a day determined by the estate executor. To calculate your capital gains tax liability, deduct your tax basis from the selling price.

Property Value

Your property’s sales price is what determines its value. This sum is crucial for determining if you’ll have to pay capital gains tax and, thus, how much.

Tax Rate

The tax rate for a property will depend on the filing status, tax bracket, and the timeframe for holding the property. Assuming you hold the house within a year, your short-term capital gains tax will be from 10% to 7%. However, keeping it beyond a year will see you paying a long-term capital gains tax at 20%, 10%, or 0%.

How Can You Avoid Paying Capital Gains Tax on Inherited Property?

Who, if anyone, wouldn’t want to minimize or avoid paying capital gains tax? Thankfully, there are specific strategies for avoiding capital gains taxes on inherited property. Here are the best ways to avoid capital gains tax on inherited property.

Seek Advice From a Financial Advisor 

Get professional advice

There might be further methods to avoid paying capital gains tax on inherited property based on the type and nature of the property you receive, your own financial status, and other reasons. However, a financial advisor is a smart option to talk with because tax laws are intricate, and you need to avoid any mistake regarding meeting your IRS obligations. 

As soon as it becomes clear that you will inherit, it would help if you considered seeking professional assistance. You can consult with a property management company specialist before passing away so that they can assign assets to you in the most favorable manner.

Sell The Property After Inheriting it

Another effective technique to prevent paying capital gains tax is immediately selling an inherited asset. You should remember that, in most situations, the fair market value of the inherited property serves as your “basis.” You can sell it and find your dream home in Washington DC. With this, you can avoid paying capital tax since you no longer own the property.

You only must pay capital gains taxes if the sale price exceeds your basis. If you resell the property as soon as you acquire it, it won’t increase in value much compared to your base. There won’t be any profit for you to file, so there won’t be any taxes due.

For instance, your parents purchased a property for $200,000 years ago, and after you inherited it, its value was $2,000,000 instead. As the home’s fair market value at the time you acquired it was $2,000,000, that amount becomes your new “basis.” Even if you quickly sold the house for $2,000,000, you wouldn’t have gained any money because of how taxes are set up. You can’t pay taxes if there is no profit.

Renounce Ownership of the Property 

You can transfer ownership of a thing to another person by denying it. This might be the inheritor after them, a different person of your choice, or even the government. A property’s disclaimer is an extreme measure you cannot change. Once you withdraw your claim, you can no longer influence the property in any way. This is an alternative to consider if selling or keeping the property seems like more work than it’s worth.

Depending on your location, the state or local legislation will determine the process to disclaim your property. Most of the time, you have nine months from the date of the inheritance to renounce the property. If you miss the deadline, you will remain the property’s owner.

Change it to a Rental Property

Rental homes are a sought-after commodity due to an increasing need for housing. It can be an excellent opportunity to create another source of income by renting out an inherited property. 

Unless you chose a 1031 exchange, also known as a like-kind exchange, you would be subject to capital gains tax when you sold the property and made a profit. If you choose this option and utilize the sale profits to buy another investment property, you can avoid paying capital gains tax.


Peradventure, you must learn how to avoid paying capital gains tax on inherited property; the first step is to consult a professional financial advisor. To avoid unpleasant tax penalties, you must understand the inherited property’s financial and legal obligations. And thus, you can avoid paying capital gains taxes.

Author Bio:

Author Name: Liran Koren

I’m Liran Koren. I’m a real estate pro and co-founder of Luxury Property Care. I believe that through common work, we can create a healthy ecosystem that serves investors, landlords, and even tenants altogether.

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