How to Calculate Cost Basis on an Inherited House

TL;DR: An inherited home's cost basis "steps up" to fair-market value at date of death — usually meaning far less taxable gain than the original purchase price would suggest.

_Last reviewed: July 2026 · 4 min read_

If you've inherited a house and are trying to figure out the tax basis, the honest answer is: the original purchase price your parent or relative paid doesn't matter anymore. Your basis "steps up" to the fair-market value on the date of death — and that's the number you'll subtract from the sale price to figure out taxable gain.

Okoniq Property Hub keeps the appraisal, closing documents, and post-inheritance improvements together in one place so the eventual sale is a clean lookup, not a scramble. Here's how to establish the basis correctly.

Why doesn't the original purchase price count?

Under U.S. tax law, most inherited assets get a stepped-up basis to fair-market value (FMV) as of the decedent's date of death. So a house bought for $50,000 in 1978 that's worth $400,000 when you inherit it has a new basis of $400,000 in your hands. If you turn around and sell it for $410,000, your taxable gain is $10,000, not $360,000.

This is one of the most valuable provisions in the tax code for ordinary families — see our real-numbers example for a walkthrough.

How do I document fair-market value at date of death?

The gold-standard document is a written appraisal from a certified real estate appraiser, dated as close to the date of death as possible. It's worth the $400–$600 it costs, because:

• It's contemporaneous evidence the IRS accepts on audit.
• It protects heirs against future disputes with siblings or the estate.
• If the property later sells for a very different price, you have a defensible starting point.

Substitutes if there's no appraisal: a comparative market analysis (CMA) from a licensed real estate agent, county assessor value (usually low — appraise higher than this), or comparable-sales research done at the time of death and preserved with dates.

What is an alternate valuation date, and when does it apply?

For estates that file Form 706 (federal estate tax return — required only for very large estates), the executor may elect an alternate valuation date of 6 months after death instead of the actual date of death. This is usually chosen when property values have dropped since the death, reducing estate tax.

If the alternate date is elected, the stepped-up basis for all heirs uses that later value — not the date-of-death value. Most estates don't file Form 706 (the federal exemption is over $13 million per person in 2026), so this rarely comes up, but it's worth asking the estate's attorney which date applies. Full detail is in IRS Publication 559 (Survivors, Executors, and Administrators).

What if I make improvements after inheriting?

Any capital improvements you make after inheriting add to your basis just like any homeowner's improvements. New roof, kitchen remodel, addition, HVAC replacement — save the receipts.

If you rent the property out before selling, the picture changes: you also start claiming depreciation, which lowers basis over time. And any depreciation claimed (or that could have been claimed) has to be recaptured at sale, taxed as ordinary income up to 25%. This is one of the most-missed post-inheritance tax traps.

Keep inherited-property records safe

The paperwork that establishes stepped-up basis is easy to lose in the chaos after a death: the appraisal gets filed with the estate's papers, the closing documents from the original purchase are decades old, and post-inheritance improvements get scattered. Okoniq Property Hub gives you one place for the appraisal, deed transfer, and every receipt going forward — so when the eventual sale happens, the basis calculation is 30 seconds, not 3 hours. See also: inherited house sale taxes and the Taxes & Accounting hub.

Frequently asked questions

What if the appraisal was never done at date of death?

You can still commission a retrospective appraisal — a licensed appraiser can value the property as of a past date using historical comps. It's less strong than a contemporaneous appraisal but is accepted by the IRS in practice.

Is there federal tax just for inheriting a house?

No. The U.S. taxes estates (paid by the estate before distribution) above the exemption threshold — but the heir doesn't pay federal income tax simply for receiving the house. See I inherited a house — do I owe taxes if I sell? for the sale-specific answer.

What about community property states?

In community property states (CA, TX, AZ, WA, NV, ID, LA, NM, WI), a surviving spouse typically gets a double step-up on a jointly held home — both halves reset to FMV at the first spouse's death. Elsewhere, only the deceased's half steps up.

Not tax advice. Basis calculations on inherited property carry serious tax consequences — confirm specifics with a licensed CPA and the estate's attorney. Okoniq Property Hub helps you keep the paperwork organized from day one. Get started free.

FAQ

How much does it cost to get a date-of-death appraisal for an inherited house?

A written appraisal from a certified real estate appraiser typically costs $400–$600 and is the gold-standard documentation the IRS accepts on audit.

Can I use the tax assessment value as proof of stepped-up basis?

You can, but county assessor values are usually lower than market value, meaning you'd be understating your basis and overpaying tax when you sell. A professional appraisal or comparative market analysis from a licensed agent is safer.

Do I need to report inheriting a house on my income tax return?

No. Simply inheriting the house is not a taxable event and does not get reported on your federal income tax return — you only report it if and when you sell the property.

What happens to my stepped-up basis if I rent the inherited house before selling it?

Your basis starts with the stepped-up value, but once you begin renting the property you must claim depreciation each year, which lowers your basis, and that depreciation is recaptured as ordinary income (taxed up to 25%) when you eventually sell.

Does stepped-up basis apply in all states or just federally?

Stepped-up basis is a federal tax rule, but most states follow federal treatment. A few states (notably California) have their own estate or inheritance tax rules, so confirm with a local CPA if state capital gains treatment differs.