Know the Law: With Inherited Homes, Not Understanding Cost Basis Can Cost You

Christina L. Krakoff
Associate, Trusts & Estates Department
Published: Union Leader
February 18, 2024

Q: If my children inherit my home, will they need to pay income tax?

A: Inheritance is generally not subject to state or federal income tax. However, the growth in value of inherited assets may be subject to state and federal income tax. Understanding what the cost basis is in the inherited assets is important for understanding whether your children (or any beneficiary of your estate) will experience a capital gain when the property is later sold.

The “cost-basis” is the original price of an acquired the asset, adjusted for capital improvements, depreciation, or other factors. When an asset is sold, the amount realized by the seller, less the cost-basis results in a capital gain or loss. Internal Revenue Code Section 1014 provides the cost basis of property acquired by inheritance shall be the fair market value (FMV) of the property at the decedent’s death. Assuming the property value has grown since you acquired it, the original cost basis is adjusted (or “stepped up”) to FMV at the date of your death. This reduces or eliminates gains your beneficiaries could experience when they sell inherited assets.

For example, father purchases his home for $200,000. At the time of his death, the property has a FMV of $300,000. Father’s original cost basis is $200,000. The cost-basis is stepped up to the date of death value, $300,000. Son, who inherited the property, has a new stepped-up cost basis of $300,000. If he sells the property soon after date of death, there may be little to no capital gain. If he waits 2 years and sells the property for $350,000, he will experience a capital gain of $50,000.

Are you contemplating a gift of property to children during your lifetime? Gifts made during life carry over your original basis and do not receive a step up in cost basis. Using the same example, if father gifted the house to son before his death, son’s cost basis in the home is the father’s original cost basis of $200,000. If son sells the property after father’s death for $350,000, he will experience a capital gain of $150,000. You can see that leaving the property at your death rather than a lifetime gift can have significant income tax benefits.

Please know that income tax planning is only one piece of the estate planning puzzle. Estate and gift tax planning, creditor protection, and more can influence how you decide to transfer assets to your beneficiaries. Speak with your estate planning attorney to understand what planning works best for your goals and circumstances.


Know the Law is a bi-weekly column sponsored by McLane Middleton.  Questions and ideas for future columns should be emailed to  Know the Law provides general legal information, not legal advice.  We recommend that you consult a lawyer for guidance specific to your particular situation.