When a parent passes and leaves a house in Weatherford or a quarter section out past Millsap, the heirs have a lot to deal with. Taxes are usually low on the list, and for good reason: inheriting property is generally not a taxable event. But what happens later, when the property is sold, depends on a rule that heirs need to act on early.
Basis, and why it resets
Basis is roughly what you paid for something, adjusted over time. When you sell, the gain is the difference between sale price and basis. For property you inherit, the basis is generally reset — "stepped up" — to its fair market value on the date of the previous owner's death. Whatever they paid decades ago is no longer relevant.
The practical effect: a house bought long ago for a small amount and worth far more today can be sold by the heirs shortly after death with little or no taxable gain, because the basis became the current value. The appreciation during the decedent's lifetime is never taxed as capital gain.
What you have to do
Establish the value at the date of death, and document it. This is the part heirs skip, and it is the part that costs them.
- For a house or land, an appraisal as of the date of death is the standard evidence. A real estate agent's opinion is weaker; an appraisal by a licensed appraiser is what holds up. Getting one within a reasonable time after death is far easier than trying to reconstruct a value years later.
- For publicly traded stock, the value is determinable from market prices on that date.
- For a business interest or unusual assets, a formal valuation.
If an estate tax return was filed, the values reported on it generally set the basis for the heirs. Most estates do not file one, so the appraisal is the record.
Community property in Texas
Texas is a community property state, and this matters. When one spouse dies, community property owned by the couple generally receives a basis step-up on both halves, not just the deceased spouse's half. That is a significant advantage compared with how jointly held property is treated in many other states, and it is one more reason to understand how title was held.
Selling inherited property
When you sell, the gain or loss is the sale price minus the stepped-up basis minus selling costs. Property inherited is automatically treated as held long-term regardless of how quickly you sell, so any gain gets long-term treatment. If the heirs hold the property for years before selling, appreciation after the date of death is taxable in the normal way — which is why the date-of-death value must be established rather than guessed.
If the inherited house becomes your home, the ordinary home sale rules eventually apply. If it becomes a rental, the stepped-up basis is what you depreciate. We covered the home sale side in Selling a Home in Texas and land in Selling Land in Texas.
What does not get a step-up
Retirement accounts — traditional IRAs and 401(k)s — do not receive a basis step-up. Withdrawals by the beneficiary are taxable income under the inherited account rules, which have their own timelines. Annuities and certain other assets carry the decedent's tax attributes with them. Gifts made during life also do not get a step-up; the recipient generally takes the giver's basis, which is why gifting appreciated property before death can be a mistake compared with leaving it.
Property tax and the homestead
Separately from all of this, Texas property tax exemptions on an inherited home do not transfer automatically. The heir who lives there needs to apply for the homestead exemption in their own name, and there are provisions for heirs who inherited without a formal probate. See The Texas Homestead Exemption.
Where we come in
The year of an inheritance is a year for a conversation rather than just a return. Our tax planning covers what to document, how to handle the sale, and how an inherited rental or retirement account fits into your picture. We work with families across Weatherford, Hudson Oaks and the surrounding counties. Get in touch before the property is sold.
What to gather now, even if you are not selling
Basis is only established once, and the evidence for it is easiest to find at the time of death. Get a written appraisal or a broker's opinion of value dated as close to that date as possible, keep a copy of the deed or the estate paperwork that shows how title passed, and note whether the property was held jointly, in a trust or solely in the decedent's name, because each of those affects how much of the basis steps up. Put all of it in a permanent file. If the property is sold in ten years, that file is the difference between a documented basis and a guess.
Families across Weatherford, Granbury and Mineral Wells come to us after a loss with exactly these questions, and the ones we can answer best are the ones where someone thought to get a valuation early.
This article is general information, not tax advice. Thresholds, forms and rules change from year to year, so confirm the details for your own situation before you file.
Inherited property and unsure what it means for your taxes? Call RD Precision Tax Service in Weatherford at (817) 480-6649, or request a free estimate. Robert has prepared returns for clients across Weatherford, Parker County and the surrounding North Texas counties since 2017.
This article is general information, not tax advice, and tax rules change from year to year. Confirm current-year figures and talk with a professional about your specific situation before acting.
Common questions
Do I owe tax when I inherit a house?
Receiving the inheritance is generally not taxable income to you. Texas has no inheritance tax. Tax comes into the picture when you sell, and the stepped-up basis usually keeps that gain small if you sell reasonably soon.
Do I need an appraisal if I am not selling right away?
Yes, and getting it now is the point. The date-of-death value is your basis whenever you eventually sell, and establishing it years later is difficult and expensive. An appraisal obtained shortly after death is the clean answer.
Does an inherited IRA get a stepped-up basis?
No. Traditional retirement accounts carry their untaxed status to the beneficiary, and withdrawals are taxable income subject to the inherited account distribution rules.
Is it better to gift property to my children now or leave it to them?
For appreciated property, leaving it usually produces a better tax result because the heirs receive a stepped-up basis, while gift recipients inherit the giver's original basis. Other considerations exist, but the basis rule is a major factor.
Have a question about your situation?
Robert prepares returns for individuals, contractors, and small business owners across Weatherford, Aledo, Willow Park, Springtown, Mineral Wells, and the rest of Parker County. Bring your questions — the first conversation is free.