MW I inherited a house. My CPA says I should sell within a year to avoid capital gains. Is he right?
By Quentin Fottrell
'We plan to sell it to another family member for the appraised value'
"It still has a mortgage outstanding." (Photo subject is a model.)
Dear Quentin,
We inherited a home. It still has a mortgage outstanding. My accountant says that if we don't sell it within six months to a year, we will have to pay capital-gains tax on the full amount we sell it for. However, if we sell it within that time limit, there would be no capital-gains tax.
We had the home appraised within a few weeks after our family member's death. We plan to sell it to another family member for the appraised value, but that may happen after the six-month time frame.
Would we still have to pay capital-gains tax?
Blessed & Confused
Related: My niece is on Social Security Disability Insurance. Will she lose her health insurance if I buy her a house?
You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com. The Moneyist regrets he cannot reply to questions individually.
Assets inherited by children generally receive a "step-up in basis," meaning capital-gains taxes are calculated based on the property's value at the time of inheritance.
Dear Blessed,
Your CPA's advice is muddled.
There is no federal tax rule requiring inherited property to be sold within any particular time frame to avoid capital-gains tax. Federal law allows for single filers to exclude $250,000 in capital-gains tax on the profit from the sale of a home; for joint filers, the exclusion is $500,000. The tax rate you would pay, if you owed capital-gains tax, would be based on your income-tax bracket. However, this capital-gains tax exclusion typically only applies to your primary residence. To qualify, you must have owned and lived in the home as your main residence for at least two of the five years prior to the sale.
About that potential profit: As you may know, assets inherited by children generally receive a "step-up in basis," meaning capital-gains taxes are calculated based on the property's fair market value at the time of death. Assuming that's the case here, there will be no capital gains due on the sale of the house if you sell it for approximately the same amount as the appraised fair-market value at the time of inheritance, whether or not the sale occurs more than six months or a year later.
If you paid $500,000 for your house and then sold it for $1 million, your capital gain would be $500,000. If you were married filing jointly and met the ownership and use tests you could exclude up to $500,000 of that gain from capital-gains taxes (single filers could exclude $250,000) if you lived in the property for two of the prior five years. In this instance, the entire $500,000 gain would be excluded, so you would not owe capital-gains tax. (For others reading this, this is why it is generally not advisable for parents to add their children to the deed of their home.)
Step-up in basis
A step-up in basis is different. If you inherited the house and its value was stepped up to $1 million at the owner's death, then selling it for $1 million shortly afterward could result in little or no taxable capital gain, because your basis would also be $1 million. Inherited property is always treated as long-term property for capital-gains purposes, regardless of how long you hold it. Depending on your taxable income, those rates are generally 0%, 15% or 20%. (Short-term capital gains, by contrast, are taxed at ordinary income-tax rates.)
As far as the Internal Revenue Service is concerned, what matters is the sale price, the difference between the sale price and your stepped-up basis, as discussed above, along with any eligible selling expenses. The mortgage is, however, relevant to the practical side of the transaction, as it gets paid off from the sale proceeds and reduces how much money is left for you and your spouse, the heirs. The mortgage itself does not determine the taxable capital gain. That's the long answer to your question. The short answer: Your accountant has their wires crossed - or you may have misunderstood what they said. If you did not misunderstand?
It may be time for a new adviser.
Related: I was a slave to credit-card debt, then I got laid off and turned my life around. Here's how I did it.
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-Quentin Fottrell
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May 25, 2026 10:16 ET (14:16 GMT)
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