How to Save on Taxes When Selling an Inherited Home
If you’ve inherited a property in Colorado, you may be surprised to learn that selling it could trigger capital gains tax. Fortunately, the IRS offers favorable treatment for inherited real estate that can significantly reduce, or even eliminate your tax liability if you have the right documentation.
At Colorado Estate Services, we guide families through the process of preparing and selling inherited homes, and we work with trusted professionals to help you make smart financial decisions.
What Is Capital Gains Tax?
Capital gains tax is a tax on the profit you make when selling a capital asset, such as a home. For most real estate, the gain is calculated by subtracting the original purchase price from the sale price.
Standard formula:
Sale Price – Purchase Price = Capital Gain
But for inherited homes, the IRS applies a different and more beneficial calculation.
How a Step-Up in Basis Works
When you inherit a home, you’re not taxed based on the original owners purchase price. Instead, you receive a step-up in basis, which adjusts the property’s value to its fair market value (FMV) on the date of the decedents death. For additional guidance, the IRS explains how basis is calculated for inherited property in Topic No. 703.
Example:
- A home was purchased in 1980 for $75,000
- The owner passes away in 2024; the home is valued at $450,000
- You sell it for $455,000 later that year
Your taxable gain is only $5,000, not $380,000, because of the step-up in basis.
This benefit can greatly reduce or eliminate capital gains tax, but it requires proper documentation.
Why You Need a Date-of-Death Appraisal
To use the step-up in basis, the IRS may require proof of the property’s fair market value on the date of death. That’s where a date-of-death appraisal comes in.
At Colorado Estate Services, we offer a complimentary date-of-death appraisal (up to $650) for families who choose to list their inherited home with us. This independent valuation can:
- Provide essential documentation for your CPA
- Support your basis in case of an IRS audit
- Serve as a financial planning tool before listing the home
A formal appraisal creates a clear, defensible record of the home’s value, whether you sell the home now or years later.
Why Timing Still Matters
Even if you’re not planning to sell the home right away, it’s important to get a date-of-death appraisal as soon as possible. Property values may rise or fall over time, but the IRS will still expect documentation of the home’s value at the time of death.
Without an appraisal:
- You may overpay taxes by underestimating your stepped-up basis
- You risk delays or issues when filing your taxes
- Your CPA may lack the information needed to calculate capital gains accurately
How We Can Help
At Colorado Estate Services, we help families navigate the sale of inherited property with clarity and care. Our team can coordinate the valuation, prep, and sale of the home, whether you’re local or managing the estate from out of state.
We’re not tax advisors, but we work closely with experienced CPAs and probate attorneys who can provide legal and financial guidance. We’ll also provide the tools you need, including a complimentary date-of-death appraisal, to make smart and informed decisions.
If you’ve inherited a home and are unsure how capital gains tax may apply, contact Colorado Estate Services. We’ll help you move forward with confidence.
