How inherited property is taxed when you sell in Texas

When you sell inherited property, you are generally taxed on the gain from the sale, not on the full amount you receive.

That gain is usually treated as a long-term capital gain, even if you sell the property shortly after inheriting it. The IRS specifically treats inherited capital assets as long-term regardless of how long you personally owned them.

Long-term capital gains use a different federal tax rate schedule than wages or other ordinary income.

Federal long-term capital gains rates are generally 0%, 15%, or 20%, depending on your taxable income.

Which rate applies depends on your total taxable income for the year, including the gain from the house. Higher-income taxpayers may also owe the 3.8% Net Investment Income Tax.

The important part is that the rate applies to your taxable gain, not the full sale price.

• If you sell an inherited house for $300,000 but your adjusted basis and selling expenses leave you with a $20,000 gain, the tax calculation starts with that $20,000 gain, not the $300,000 sale price.

Because the income thresholds change over time, a CPA can tell you which rate applies to your specific sale.

Your basis is the number the IRS uses to calculate whether you made a gain or loss when you sell.  

When you inherit a house, that number usually changes from what the previous owner paid to what the house was worth when they died. That change is called a step-up in basis.

• Example: Your parent bought the house for $90,000. At the time they died, it was worth $320,000. Your basis generally steps up from $90,000 to $320,000. So if you later sell it for $335,000, you are looking at a $15,000 gain, not a $245,000 gain.

The important part is that you are not taxed on the entire sale price. You are taxed on the gain after your inherited basis is taken into account.

First, check the estate or probate records. A date-of-death value may already have been established.

If no reliable date-of-death value was established, a retrospective appraisal is often the cleanest way to document it, especially when the death was years ago.

That value should reflect what the house was really worth in its condition at the time. A home with major repairs or years of deferred maintenance should not automatically be valued like the renovated homes that sold nearby.

If you still have old photos, inspection reports, repair estimates, or other records showing the condition of the house around that time, keep them. They can help support a more accurate valuation.

Once you know the inherited basis, the basic calculation is:

Sale price − selling expenses − adjusted basis = gain or loss

Selling expenses are costs directly tied to the sale, such as agent commissions, certain legal and closing fees, and other seller-paid transaction costs.

For example, if the home’s stepped-up basis is $280,000, you sell for $310,000, and you have $18,000 in selling costs, your gain is about $12,000.

Your basis can also change after you inherit the house. If you make capital improvements after you inherit the house, those costs can increase your adjusted basis. For example, replacing the entire roof, rewiring the home, or adding central air can increase basis. Routine repairs and maintenance generally do not. Source: IRS Publication 551

One important distinction: your mortgage payoff is not part of this calculation. It affects how much money you receive at closing, but it does not reduce your capital gain.

For an individual seller, Texas does not add a separate state capital gains tax to the sale of an inherited house. Texas prohibits an individual income tax, so the capital gain is generally a federal tax issue.

That does not mean the sale is tax-free. You may still owe federal capital gains tax based on your gain and taxable income.

If you live in another state, that state may have its own income or capital gains rules, so check with your CPA before assuming the Texas treatment is the whole picture.

If the house sells for less than its adjusted basis after qualifying selling expenses, there is generally no capital gain to tax.

You may also have a capital loss. Whether that loss is deductible depends on how the property was held and used. A loss on property held for investment may be deductible, while a loss on a home used personally generally is not.

If you are deciding what to do with the property itself, Big State buys inherited homes in Houston and DFW. No repairs required. We deal in all aspects of inherited home sales, including title issues, probate, liens, and multiple heirs.