When you inherit real estate, the IRS generally resets your cost basis to the property's fair market value on the date the decedent died. This "step-up in basis" can eliminate a massive tax bill that would otherwise hit heirs who sell.
How step-up works
Suppose your mother bought a rental property in 1995 for $80,000. At her death in 2025, it appraises at $320,000. Under step-up rules, your new basis is $320,000—not the original $80,000. If you sell it six months later for $325,000, your taxable gain is only $5,000, not the $245,000 gain that accumulated during her lifetime. That $240,000 of appreciation simply disappears for capital-gains purposes.
The same principle applies to a primary residence, vacation home, or commercial building. The clock resets. Depreciation recapture that would have applied to your mother also vanishes; you start fresh if you convert the property to a rental.
Lifetime gifts do NOT get step-up
This is where many families trip up. If your mother had gifted you that same property while she was alive, you would inherit her $80,000 basis (carryover basis). Selling at $325,000 means a $245,000 gain and a federal tax bill in the neighborhood of $37,000 to $49,000, depending on your bracket and state. The gift saved no tax; it cost you the step-up.
For appreciated real estate, holding until death is often far more tax-efficient than gifting during life. There are exceptions—if the property is likely to appreciate sharply and the donor has unused estate-tax exemption—but the default math favors inheritance.
Joint tenancy and community property nuances
In community-property states (including Texas), both halves of jointly held property may receive a step-up when the first spouse dies. In common-law states, typically only the decedent's half steps up. The surviving spouse's half retains the old basis. If you inherit property held joint-tenancy-with-rights-of-survivorship in a common-law state, confirm which portion steps up; don't assume the entire basis resets.
The Alliance take
Basis step-up is one of the most powerful wealth-transfer tools in the tax code, yet it catches families off guard every day. We see heirs rush to sell inherited property without realizing they're sitting on a clean basis. Others discover too late that a well-meaning lifetime gift created a five-figure tax problem that a few more years of patience would have erased.
If you're weighing whether to gift real estate now or let it pass through your estate, model both scenarios with hard numbers. If you've just inherited property and plan to sell, get a date-of-death appraisal in writing; that appraisal establishes your stepped-up basis and can save tens of thousands when you file your return.
Consult a CPA or attorney; this is not tax or legal advice. For mortgage questions on inherited or gifted property, start an application or reach out—we'll walk you through documentation and program fit.