Capital Gains on Inherited Property: The Step-Up, Selling Soon, and Where Opportunity Zones Fit (and Don't)

Agents list inherited houses all the time, and the heirs almost always ask the same question: “Will we owe capital gains tax?” The honest answer is usually “less than you think, maybe none,” because of the basis step-up. This guide explains why, when tax does apply, and where an Opportunity Zone fund fits. That last part is a short list, and we’ll say so plainly.

It’s part of our series for agents. The hub is OZ talking points for your next listing appointment.

The step-up: why heirs often owe little or nothing

When someone inherits property, their basis is generally its fair market value on the date of death, not what the decedent paid (IRC §1014; IRS Publication 551). Decades of appreciation, and any depreciation the decedent took on a rental, drop out of the heir’s gain.

• Sell soon after the death: the gain is usually small. After selling costs, the heirs may even show a loss, and the CPA can say whether it’s deductible.
• Hold and sell later: only the growth since the death is taxed.
• Always long-term: inherited property is treated as held more than a year, however soon it’s sold (IRC §1223(9)).
• Community property states: both halves of a married couple’s community property can get the step-up at the first death (IRC §1014(b)(6)).

An estate may elect a value six months after death in some cases (IRC §2032); the executor’s advisors decide that.

When the step-up doesn’t apply

Ask how the property passed. These are the common surprises:

• Lifetime gifts. Property given before death generally keeps the giver’s basis (IRC §1015). A parent who “put the house in the kids’ names” years ago may have given away the step-up.
• Added to the deed. Joint ownership can mean only part of the property gets a step-up.
• Trusts. Some trusts get the step-up and some don’t. That’s for the estate attorney.

Where Opportunity Zones fit, and where they don’t

An Opportunity Zone fund defers an eligible capital gain invested within 180 days (IRC §1400Z-2). With inherited property, the step-up usually leaves little or no gain to defer, so for most heirs who sell within a year or two, an Opportunity Zone fund isn’t relevant. Don’t suggest one just because it’s in the news.

It can be relevant when:

• The heirs held the property for years and it appreciated a lot after the death.
• The heirs sell other appreciated assets at the same time, such as inherited stock that rose after the death, and want to defer that gain.
• The heirs want to keep the money invested in real estate through a fund and have a meaningful gain to put in.

In those cases, the same rules apply as for any seller: the 180-day deadline calculator gives the last day to invest, and the Opportunity Zone tax benefits guide explains the deferral, the 10% step-up after five years for investments from January 1, 2027, and the 10-year exclusion.

If the decedent owned an Opportunity Zone fund interest, that’s a different situation. The transfer at death isn’t an inclusion event, but the deferred gain doesn’t disappear: it’s taxed to the heir when an inclusion event later happens (Treas. Reg. §1.1400Z2(b)-1(c)(4)). Send the heirs to the estate’s CPA.

If the heirs want to keep it as a rental

An inherited rental starts over with the stepped-up basis, so the heirs depreciate the building again from the date-of-death value. When they eventually sell, the usual rental rules apply; see capital gains tax on rental property. If they sell to buy another rental, a 1031 exchange can defer the post-death gain. The 1031 vs DST vs Opportunity Zone calculator compares the options.

Agent checklist for an inherited listing

• Date of death, and who has authority to sign (executor, administrator, or trustee)
• A date-of-death appraisal. If there isn’t one, suggest the executor get a retrospective appraisal. Your comparable sales near that date can help, but they aren’t an appraisal.
• How title passed: will, trust, joint ownership, or a lifetime gift
• Whether the heirs used it as a home or rented it after the death
• Timing with the estate: probate, any estate tax return, and when the heirs need the money

If the property is land or sits in an Opportunity Zone tract, check it on the Opportunity Zone map; fund buyers may be interested even if the heirs have no gain to defer. See selling land or property to opportunity funds.

Related reading

• How to avoid capital gains tax on real estate: where OZs fit
• Opportunity Zone exit strategies
• OZ talking points for agents (series hub)

Sources: IRC §1014; IRC §1015; IRC §1223; IRC §2032; IRS Publication 551; IRC §1400Z-2; Treas. Reg. §1.1400Z2(b)-1.

Not tax advice.