Many people inherit property at some point in their lives.

But how it will be taxed?

Depending on the estate plan, heirs and beneficiaries can end up inheriting all kinds of property at some point in their lives.

If you inherit property or assets, as opposed to cash, you potentially won’t owe taxes until you sell those assets. 

For this reason, it’s important to understand how the potential taxes you’ll pay will be applied, and how they could affect your financial situation.

Consulting a fiduciary financial advisor can be a great first step to understanding your inheritance, the potential tax repercussions, and how they could affect your overall financial plan. That's why we created a free tool to help match you with up to three financial advisors.

Click here to take our quick retirement quiz and get matched with vetted advisors in just a few minutes, each obligated to work in your best interest.

Research suggests people who work with a financial advisor feel more at ease about their finances and could end up with about 15% more money to spend in retirement.¹

A 2022 Northwestern Mutual study found that 62% of U.S. adults admit their financial planning needs improvement. However, only 35% of Americans work with a financial advisor.²

When you inherit property, whether real estate, securities or almost anything else, the IRS applies what is known as a stepped-up basis to that asset.

This means, for tax purposes, the base price of the asset resets to its value on the day you inherited it. If you were to hypothetically inherit property and then immediately sell it, you would potentially owe no taxes on those assets.

The rules are the same whether you jointly own the property or not. Capital gains tax on the jointly owned inherited property will be evenly split, based on the ownership stake, for each owner who inherited a piece of the property.

Capital gains taxes are paid when you sell an asset. They are levied only on the profits (if any) you make from this sale. For example, say you buy a stock for $10. Later on, you sell that same stock for $50. You will owe capital gains taxes on the $40 you made from this transaction.

Two prices are involved in establishing a capital gain tax: The sale price (how much you sold the asset for) and the original cost basis (how much you paid for it). In our hypothetical example, the sale price of this stock is $50 and the original cost basis is $10. You are taxed on the difference: $40 in taxable income.

Now consider the hypothetical scenario that your grandparents bought their house years ago for $50,000. Since then it has skyrocketed in value and is worth $800K. If they were to sell the house, they would potentially pay capital gains taxes on $750K.

• Sale price ($800K) – Original cost basis ($50K) = $750K

However, consider they pass away and you inherit the house. At the moment you inherit, the IRS will consider the house’s original cost basis stepped up to the current market value. This means that if you sell it immediately, you will pay no capital gains taxes:

• Sale price ($800K) – Stepped-up original cost basis ($800K) = $0 taxable capital gains

On the other hand, say you hold the house for a year, during which the price goes up another $100K. If you sell, you would owe capital gains taxes only on $100K:

• Sale price ($900K) – Stepped-up original cost basis ($800K) = $100K taxable capital gains

The stepped-up cost basis means it is relatively rare for heirs to pay significant taxes on any amount of inheritance.

There are some ways to avoid paying capital gains tax on inherited property worth considering if you’re the beneficiary of an estate or trust.

Deciding whether or not to sell inherited property or assets calls for careful evaluation of your financial and tax situation. That’s where a financial advisor can be invaluable.

But how do you find a vetted fiduciary financial advisor, obligated to work in your best interest?

This is the biggest hurdle for many. With thousands of daily Google searches for "Fiduciary financial advisors near me," "best fiduciary financial advisor," and "financial investment advisors near me," the hunt for a vetted fiduciary advisor can feel like a wild goose chase.

But it doesn't have to be. And thankfully, it really isn't.

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