Who Pays Capital Gains Tax on an Inherited House?

The answer isn't always as simple as "the person who inherited it." Who's actually responsible for capital gains tax on an inherited house often comes down to how the property was legally transferred. Here's a breakdown from Real Time Home Buyers Metro Detroit.

Transferred Through a Will (Probate)

This is the most common path. If the house passes through probate under a will, the beneficiary named to receive the property becomes responsible for any capital gains tax once they sell it — calculated against the stepped-up basis (the home's value on the date of death). If the executor sells the house before it's distributed, the estate itself may handle the tax instead, or pass it through to beneficiaries via a K-1, depending on how the sale is structured.

Held in a Revocable Living Trust

If the home was in a revocable trust while the original owner was alive, it's treated as part of their estate at death and still gets the stepped-up basis. Once the trust becomes irrevocable (which typically happens automatically when the person passes away), the named beneficiaries generally become responsible for capital gains tax when they sell — similar to inheriting through a will.

Held in an Irrevocable Trust

This one's different. If the property was placed in an irrevocable trust before the person's death, it's usually not considered part of their taxable estate, which can mean no step-up in basis. Depending on the trust's terms, the trust itself may be responsible for capital gains tax on a sale, or the tax liability may pass through to the beneficiaries when trust proceeds are distributed. This is a scenario where getting advice from an estate attorney is especially worthwhile.

Joint Tenancy with Right of Survivorship

If the deceased co-owned the home with someone else — a common setup between spouses — the surviving co-owner typically becomes the sole owner automatically, without probate. Only the deceased's share of the property typically gets a stepped-up basis; the survivor's original share keeps its original cost basis. That means the surviving owner is responsible for capital gains tax on a future sale, calculated using this "half-stepped-up" basis.

Transfer-on-Death (TOD) Deed

In states that allow it, a TOD deed lets a property pass directly to a named beneficiary at death, skipping probate entirely. The named beneficiary receives the stepped-up basis just as they would through a will, and they become responsible for any capital gains tax if they later sell.

The Common Thread

No matter which of these paths applies, the underlying math is usually the same: capital gains tax is based on the difference between the sale price and the stepped-up basis, and whoever ends up owning the property at the time of sale is generally the one responsible for that tax. What changes is who that ends up being, and how quickly they gain the legal authority to sell.

If you're trying to figure out where you stand after inheriting a house — whatever the legal path was — Real Time Home Buyers Metro Detroit is happy to help you think through next steps and can make selling straightforward once you're ready. Call us at 248-509-5398.

This article is for general informational purposes only and isn't tax or legal advice. Trust and estate structures vary widely, so please consult an estate attorney or CPA about your specific situation.