What to Do With an Inherited House: Sell, Rent, or Keep?

The tax math is different from any other real estate decision you've made. Here's how step-up basis, depreciation recapture, and your timeline shape each option — with 2026 numbers.

When you inherit real estate, you face a decision that has to be made within a compressed timeline — often while you're still dealing with grief and estate paperwork. The financial stakes are real: a wrong move can cost tens of thousands in avoidable taxes. A right move can let you sell with almost zero federal capital gain.

This guide walks through each option with specific numbers. We'll use a concrete example throughout: a house worth $650,000 at the time of the decedent's death, which the original owner purchased 25 years ago for $150,000.

The hidden advantage: step-up in basis

Under IRC §1014, your tax basis in inherited property is "stepped up" to its fair market value on the date of death — not the price the decedent originally paid. For our example house:

Original purchase price: $150,000 (the decedent's basis)
Your inherited basis: $650,000 (date-of-death FMV)
The $500,000 in lifetime appreciation? Never taxed.

This is the most important tax fact about inherited property. It completely changes the math compared to selling your own home that you've owned for years.

What step-up basis means practically:

If you sell for $660,000 shortly after inheriting at $650,000 → taxable gain of $10,000
If you sell for $650,000 exactly → $0 capital gain, no federal tax owed
If the house declined in value before the estate settled → you may have a step-down, which can offset other gains

Important: Establish the FMV immediately with a qualified appraisal. You'll need this to document your basis when you eventually sell — and the IRS will scrutinize it. Get the appraisal while the estate is still open.

Option 1: Sell now (or soon)

Selling quickly is often the most tax-efficient choice because the step-up basis is fresh and prices haven't moved much from your inherited basis.

The tax math

If you sell within a year for $670,000 (the house appreciated slightly):

Your basis: $650,000
Sale price: $670,000
Capital gain: $20,000
Federal LTCG tax (at 15%): $3,000

Compare this to what a sale would have looked like from the decedent's position: $670,000 − $150,000 basis = $520,000 gain. That's potentially $78,000–$104,000 in federal tax. The step-up basis just saved you that entire amount.

In 2026, long-term capital gains rates are:¹

0% — taxable income up to $49,450 (single) / $98,900 (MFJ)
15% — taxable income $49,450–$545,500 (single) / $98,900–$613,700 (MFJ)
20% — taxable income above $545,500 (single) / above $613,700 (MFJ)

If your total income is modest the year of the sale, you may owe 0% even on the small gain above your stepped-up basis.

Net Investment Income Tax (NIIT): If your modified AGI exceeds $200,000 (single) or $250,000 (MFJ), the 3.8% NIIT applies on top of LTCG rates.² These thresholds are set by statute and not adjusted for inflation.

When selling now makes sense

You have co-heirs (siblings, other beneficiaries) — selling is far simpler than co-managing rental property
The property needs significant repairs or updates you don't want to fund
You have no interest in being a landlord
The house is in a different state or city from where you live
You want to reinvest the proceeds according to your own financial plan

Option 2: Rent it out

Keeping the property as a rental generates ongoing income and delays the capital gains decision. But it introduces depreciation recapture — a tax most people don't think about until they sell.

The depreciation basis reset

When you convert inherited property to a rental, you depreciate it over 27.5 years using straight-line depreciation. Your depreciable basis is the stepped-up FMV minus the land value (land is not depreciable). If land is 20% of value:

Inherited FMV: $650,000
Land value: $130,000
Depreciable basis: $520,000
Annual depreciation: $520,000 ÷ 27.5 = $18,909/year

This depreciation reduces your rental income taxes each year — that's the benefit. But it also reduces your adjusted basis, which increases your gain when you eventually sell.

The depreciation recapture cost at sale

Say you rent for 5 years, accumulating $94,545 in depreciation. Then you sell for $800,000:

Adjusted basis: $650,000 − $94,545 = $555,455
Sale gain: $800,000 − $555,455 = $244,545
Depreciation recapture: $94,545 taxed at max 25% (unrecaptured Section 1250 gain)³ = $23,636
Remaining appreciation ($150,000): taxed at LTCG rate (15%) = $22,500
Total federal tax on rental path: ~$46,136

Compare to selling now for $700,000: gain of $50,000 taxed at 15% = $7,500 federal tax. The rental path deferred the gain but created more of it — and the 25% recapture rate is higher than the 15% LTCG rate most people pay.

The rental math works better when:

You're in a high-income year right now and expect lower income later (converts the gain to a future lower-rate year)
The property has strong rental cash flow relative to its value
You expect significant appreciation and want to defer the tax
You plan to hold until death, passing the property to heirs with another step-up

The 1031 exchange option

If you're a real estate investor, you can eventually sell the rental and do a 1031 exchange into a replacement property, deferring all capital gains and depreciation recapture. Rules: identify replacement property within 45 days of sale, close within 180 days. The OBBBA (July 2025) did not change 1031 exchange rules — they remain fully intact.⁴

Option 3: Move in yourself

If the inherited property could be your primary residence, moving in opens up the IRC §121 exclusion: after living there for 2 of the last 5 years, you can exclude up to $250,000 of capital gain from sale ($500,000 for married couples). This stacks with the stepped-up basis.

Example: You inherit a house at $650,000, move in, live there for 2 years. You sell for $900,000.

Gain: $900,000 − $650,000 = $250,000
Exclusion available (single): $250,000
Taxable gain: $0

One caution: if you rent the house before moving in, the "non-qualified use" rules under TCJA reduce the exclusion proportionally. A tax advisor should model this before you decide to rent briefly and then convert.

When you can't decide quickly: co-heirs and trust provisions

Many inherited properties involve multiple heirs or trust restrictions that limit your options:

Multiple heirs: All beneficiaries must agree to sell. If one wants to keep the property, you may need a partition action or buyout — both costly and slow.
Trust-held property: The trustee controls the sale timeline, not the beneficiaries. Review the trust document: some require sale within a defined period, others give the trustee full discretion.
Estate in probate: The executor controls real property until the estate is closed. Property may not be sold until probate concludes — which can take 6–18 months in some states.

Even if you can't sell immediately, you should still get the appraisal to document the stepped-up basis. That's the one step that can't be deferred.

First 90 days: what to do regardless of which path you choose

Get a certified appraisal (or two, for estates over $1M) to establish FMV at date of death.
Check whether the estate owes Form 706 — only required if the gross estate exceeds $15 million in 2026 (OBBBA raised the exemption permanently). Deadline is 9 months from date of death, extendable to 15 months.
Check state inheritance or estate tax — 5 states have an inheritance tax; 12 have an estate tax with lower thresholds than federal. See our state-by-state guide.
Secure the property — change locks, ensure insurance coverage names you as beneficiary, transfer utilities.
Get legal title — depending on how the property was titled (joint tenancy, revocable trust, tenancy in common), you may need an affidavit, trust certification, or probate decree to transfer title.

Use our tools

To quantify the tax impact of different decisions for your specific situation:

Step-Up Basis Tax Savings Calculator — see exactly how much step-up basis saves you on the inherited property
Inheritance Tax Calculator — estimate any state inheritance or estate tax due

For a complete walkthrough of all the moving pieces in the first year after an inheritance, see our Complete Guide: What to Do When You Inherit Money.

Talk to an advisor who handles this every week

Real estate in an estate raises questions that go beyond tax law — family dynamics, co-heir coordination, trust interpretation, integration with the rest of the inheritance. A specialist who handles 20–30 of these per year will spot the angles your accountant might miss.

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Sources

Tax values verified as of April 2026 against IRS Rev. Proc. 2025-32 and IRS.gov publications. State tax rules vary; consult a tax advisor for your specific situation.