In most cases, heirs who sell an inherited home in Pennsylvania or New Jersey owe little or no capital gains tax. The reason is a provision in federal tax law called the step-up in basis, which resets the home’s cost basis to its fair market value on the date the previous owner died. Because the basis is reset to the date-of-death value, the taxable gain is calculated only on appreciation that occurs after the death, not on decades of appreciation during the deceased owner’s lifetime. This single rule is the most important and most misunderstood part of selling an inherited home.
This guide explains how it works, the situations where a gain still arises, and how Pennsylvania and New Jersey treat the question.
What the step-up in basis means
Capital gains tax is calculated on the difference between what you sell an asset for and your cost basis in that asset. For a home you purchased, your basis is generally what you paid plus the cost of capital improvements.
For an inherited home, the basis is different. Under Internal Revenue Code Section 1014, the basis of inherited property is “stepped up” to the fair market value as of the date of the previous owner’s death. The price the deceased originally paid for the home becomes irrelevant.
An example makes this concrete. Suppose a parent bought a home in Abington in 1985 for $90,000. By the time they passed away in 2026, the home was worth $480,000. If the children had received the home as a gift during the parent’s lifetime, their basis would have been $90,000, and a sale at $480,000 would generate a $390,000 taxable gain. But because they inherited it, the basis is stepped up to $480,000, the date-of-death value. If they sell it shortly after for $485,000, the taxable gain is only $5,000, not $390,000.
The step-up is the reason most inherited-home sales generate little or no capital gains tax. The decades of appreciation during the parent’s ownership are effectively erased for tax purposes.
Why the date-of-death appraisal matters
Because the stepped-up basis is the fair market value on the date of death, establishing that value accurately is important. If the property is sold close to the date of death, the sale price itself often serves as good evidence of value. If there is a gap between the death and the sale, a formal date-of-death appraisal from a licensed appraiser establishes the basis.
This is one of the two distinct valuations every estate sale requires, and confusing them creates problems. The date-of-death appraisal establishes the tax basis. The current comparative market analysis establishes the likely selling price today. Both are needed, and they serve different purposes.
A higher documented date-of-death value means a higher basis, which means a smaller taxable gain when the property sells. Underestimating the date-of-death value can create an unnecessary tax liability. This is a question for the estate’s accountant and appraiser, and getting the valuation right early protects the estate.
When an inherited home sale does generate a taxable gain
The step-up does not mean there is never a gain. A taxable gain arises in these situations:
The home appreciates between the date of death and the sale. If the date-of-death value was $480,000 and the property sells two years later for $540,000, the $60,000 of post-death appreciation is a taxable gain to the estate or the heirs. In a rising market, holding an inherited property for an extended period before selling can create a gain that a prompt sale would have avoided.
The home was held long enough to appreciate meaningfully. Estates that take two or three years to resolve, or heirs who hold a property as a rental before eventually selling, accumulate post-death appreciation that becomes taxable.
The property was converted to a rental or investment use. Once an inherited home becomes a rental, depreciation and different tax rules apply, and the eventual sale is treated differently from a prompt estate sale.
In each case, the gain is calculated only on the appreciation after the date of death. The longer the gap and the stronger the market, the larger that gain can be.
How Pennsylvania and New Jersey treat the question
Capital gains tax is federal. The step-up in basis applies the same way in both Pennsylvania and New Jersey because it is a federal rule. The federal long-term capital gains rate (for assets held more than a year, which inherited property automatically qualifies for) is 0%, 15%, or 20% depending on the taxpayer’s income.
State income tax on the gain differs. Pennsylvania taxes capital gains as ordinary income at the flat state rate. New Jersey taxes capital gains as ordinary income at its graduated state rates. In both states, the gain subject to state tax is the same post-death appreciation figure, so a prompt sale that minimizes the federal gain also minimizes the state gain.
This is separate from inheritance tax. Capital gains tax and inheritance tax are different taxes that people frequently confuse. Inheritance tax is assessed on the transfer of assets from the deceased to the beneficiaries, based on the relationship between them. Capital gains tax is assessed on the profit from selling an asset. An inherited home can be subject to inheritance tax at the transfer and capital gains tax at the sale, but the step-up in basis usually keeps the capital gains portion small. For the inheritance tax side, the Pennsylvania executor’s guide and the New Jersey executor’s guide cover the rates and exemptions by beneficiary class.
The practical takeaway for executors and heirs
Get the date-of-death value documented. Whether through a prompt sale or a formal appraisal, establish and document the fair market value as of the date of death. This is the basis that protects the estate from an inflated capital gains bill.
Understand that a prompt sale usually minimizes the gain. Because the gain accrues only on post-death appreciation, selling closer to the date of death generally results in a smaller taxable gain. This is one more reason there is rarely a financial advantage to letting an inherited property sit.
Coordinate with the estate’s accountant. The specific tax treatment depends on the estate structure, the beneficiaries, and whether the property was used personally or as an investment. Karen provides the real estate side of the analysis, the current market value and the sale logistics, and coordinates with the estate’s accountant on the tax questions.
This guide is general information, not tax advice. The estate’s accountant or tax attorney should confirm the specific treatment for any individual situation.
Note that this step-up applies to inherited property. A homeowner selling their own home during their lifetime uses their actual cost basis instead, and relies on the Section 121 exclusion to shelter the gain. The tax considerations of selling a home in retirement cover that situation.
Working with Karen
Karen Langsfeld is a REALTOR® and Pricing Strategy Advisor (P.S.A.) with Berkshire Hathaway HomeServices Fox & Roach, licensed in both Pennsylvania and New Jersey. She works with executors and heirs across Montgomery County, Bucks County, the Main Line, and South Jersey, coordinating the date-of-death valuation, the current market analysis, and the sale logistics in coordination with estate counsel and accountants.
The estate sales page covers the full range of engagements Karen handles. For executors who want to understand the full process, the Pennsylvania executor’s guide to selling an inherited home covers probate authority, valuation, and preparation in detail.
Contact Karen at (215) 495-2914 or through the contact page.