Capital Gains and the Stepped-Up Basis: What Texas Heirs Must Know Before Selling

Direct answer: When you inherit a house in Texas, your cost basis for tax purposes is "stepped up" to the home's fair market value on the date of the original owner's death — not what they originally paid. This means if you sell quickly, you may owe zero capital gains tax even if the home appreciated dramatically during the deceased's lifetime. Texas has no state income tax, so only federal capital gains tax applies.

By Zareena Samidon | Samidon Realty Group | Colleyville, TX

Table of Contents

1. What Is the Stepped-Up Basis and Why Does It Matter?
2. How to Calculate Your Taxable Gain on an Inherited Texas Home
3. Texas-Specific Tax Advantages
4. The Timing Risk: Why Waiting Can Cost You
5. Community Property Basis Rules (for Surviving Spouses)
6. Depreciation Recapture (for Inherited Rental Properties)
7. Non-Texas Residents Selling Texas Property
8. Frequently Asked Questions

What Is the Stepped-Up Basis and Why Does It Matter?

Your cost basis is the starting point the IRS uses to calculate capital gains. When you sell a home, capital gains tax applies to the difference between your sale price and your cost basis.

For a home you purchased yourself, basis = purchase price + capital improvements.

For a home you inherited, the IRS applies Internal Revenue Code § 1014, which steps up your basis to the fair market value on the date of the decedent's death. The decades of appreciation that occurred during the original owner's lifetime disappear from a tax perspective the moment the owner dies.

A concrete DFW example:

Without the step-up, the heir would owe capital gains on $356,000 of gain ($445,000 − $89,000), potentially $53,400 in federal tax. The stepped-up basis reduces that bill to $2,250.

This is one of the most valuable provisions in the U.S. tax code for inherited real estate — and one of the most underutilized because heirs don't know it exists.

How to Calculate Your Taxable Gain on an Inherited Texas Home

Step 1: Establish the date-of-death value (your new basis)

The IRS requires that this value reflect the property's fair market value on the exact date of death — not the date you opened probate, not the date you decided to sell.

How to establish this value:

• Certified appraisal: A licensed residential appraiser conducts a "date of death" retrospective appraisal, assessing what the property would have sold for on that specific date. This is the most defensible method for the IRS.
• Comparative market analysis: A real estate professional prepares a written analysis of comparable sales near the date of death. Less formal than an appraisal but acceptable for smaller estates.
• IRS Form 706 estate appraisal: If the estate was large enough to require an estate tax return, the appraisal from that filing establishes the basis.

Any capital improvements you make to the property after inheriting it — a new roof, HVAC system, addition — are added to your basis. Routine maintenance and repairs are not.

Step 3: Calculate your gain

Sale price − (stepped-up basis + post-death improvements) = taxable gain

If the result is zero or negative, you owe no capital gains tax.

Step 4: Determine your holding period

For inherited property, the IRS automatically treats your holding period as long-term regardless of how long you actually held it before selling. This is critically important — long-term capital gains rates (0%, 15%, or 20% depending on income) are significantly lower than short-term rates (ordinary income rates up to 37%).

You could inherit a property and sell it the next day, and you'd still qualify for long-term capital gains rates.

2026 federal long-term capital gains tax rates:

Texas-Specific Tax Advantages

No state income tax. Texas is one of nine states with no personal income tax. Capital gains from real estate sales are ordinary income for state tax purposes in most states — in Texas, there is no such tax. Every dollar of gain is subject only to federal rates.

No Texas inheritance tax. Texas abolished its inheritance tax in 2015. There is no state-level tax on receiving an inheritance, regardless of the size of the estate.

No Texas estate tax. Texas does not impose a separate state estate tax. Only the federal estate tax applies — and only to estates exceeding $13.61 million (2025 threshold, indexed for inflation).

Property tax reassessment caution. Texas does reassess property taxes when ownership transfers, including through inheritance. If the deceased had a homestead exemption (reducing their taxable value), that exemption may not automatically transfer to you. Contact the county appraisal district after inheriting to understand the property tax implications and apply for any exemptions you qualify for. Tarrant County: (817) 284-0024. Dallas County: (214) 631-0910.

The Timing Risk: Why Waiting Can Cost You

The stepped-up basis is calculated at the date of death. Every day you hold the property after that, the market moves — and any appreciation above the date-of-death value is taxable gain.

The DFW market context: DFW home prices have increased an average of 5–8% annually over the past decade. On a $400,000 property, that's $20,000–$32,000 in appreciation per year — all taxable gain accumulating above your stepped-up basis.

Example of holding cost:

These numbers seem manageable in isolation — but they represent real money that belongs to the heirs and is lost purely due to delay. For an estate with three heirs, $9,900 in avoidable tax means $3,300 less per heir.

This is separate from the carrying costs (mortgage, taxes, insurance, maintenance) that also accumulate during an extended hold.

Community Property Basis Rules (for Surviving Spouses)

Texas community property rules create an exceptionally favorable basis outcome for surviving spouses — one that many people miss entirely.

Under IRC § 1014(b)(6), when one spouse dies, both the deceased spouse's half and the surviving spouse's half of community property receive a stepped-up basis.

Standard (non-community property state) outcome:

Deceased spouse's 50% share: stepped up to date-of-death value ✓

Surviving spouse's 50% share: retains original purchase price basis ✗

Texas community property outcome:

Deceased spouse's 50% share: stepped up ✓

Surviving spouse's 50% share: also stepped up ✓

Why this matters enormously:

A couple bought a DFW home in 1992 for $120,000. The home is worth $480,000 when one spouse dies in 2025. The surviving spouse sells in 2026 for $490,000.

In a non-community property state, the surviving spouse's basis = $60,000 (their original half) + $240,000 (stepped-up half) = $300,000. Taxable gain: $190,000.

In Texas (community property), the surviving spouse's basis = $480,000 (full step-up on both halves). Taxable gain: $10,000.

The Texas community property advantage can eliminate tens of thousands of dollars in federal capital gains tax for surviving spouses. This is a compelling reason to sell shortly after the death of a spouse, while both halves of the stepped-up basis are intact.

Depreciation Recapture (for Inherited Rental Properties)

If the inherited property was used as a rental by the deceased, there's an additional tax consideration: depreciation recapture.

When landlords rent property, the IRS requires them to take annual depreciation deductions (typically over 27.5 years for residential property). These deductions reduce the property's tax basis over time. When the property is sold, the IRS "recaptures" those deductions at a maximum rate of 25% — even if the property is inherited.

The step-up does not eliminate depreciation recapture. The stepped-up basis applies to the full property value, but if the deceased took depreciation deductions, those deductions reduce the inherited basis by the amount depreciated.

Example:

• Home purchased in 2010 for $200,000
• Depreciation taken over 14 years: ~$72,000
• Adjusted basis at death: $128,000
• Date-of-death value (stepped-up basis): $400,000
• The step-up brings basis back to $400,000, but any sale above that triggers the normal capital gains calculation
• The depreciation recapture issue primarily affects the estate's taxes, not the heir's, because the step-up resets the basis — but your CPA should confirm this for your specific situation

This is a complex area. If the inherited property was a rental, involve a CPA early.

Non-Texas Residents Selling Texas Property

If you live outside Texas and inherit Texas real estate:

No Texas tax applies. Texas has no state income tax regardless of the seller's residence.

Your home state may tax the gain. Several states (California, New York, New Jersey, Oregon, Minnesota, and others) tax their residents on capital gains from property sales, even if the property is located in another state. You'll file a Texas sale on your home state's income tax return if your state requires it.

FIRPTA: If you are a non-U.S. person (non-resident alien), a 15% withholding on the gross sale price applies under FIRPTA. The title company handles this automatically; you file a U.S. tax return to reconcile.

Frequently Asked Questions

Do I owe any tax if I sell the inherited Texas home immediately after probate?

Possibly very little or nothing. If the sale price equals the date-of-death appraised value, your taxable gain is zero. Any gain above the stepped-up basis is taxable at long-term capital gains rates (0–20% federally). Texas has no state tax.

What if the inherited house is worth less now than when the owner died (it went down in value)?

If you sell for less than your stepped-up basis, you have a capital loss — potentially deductible against other capital gains or, with limitations, against ordinary income. Your CPA can advise on this.

How do I establish the date-of-death value for the IRS?

A licensed appraisal performed by a certified residential appraiser is the strongest documentation. Some estates use a broker's price opinion (BPO) or comparative market analysis for lower-value properties. For estates requiring a federal estate tax return (Form 706), a formal appraisal is mandatory.

Does the stepped-up basis apply to property received as a gift before death?

No. Property received as a gift during the giver's lifetime carries over the giver's original basis — there is no step-up. Only property inherited at death receives the stepped-up basis. This is why estate planning attorneys generally advise against gifting appreciated property during life.

What if I rent the inherited property for a few years before selling?

Any rental income is taxable in the years it's received. More importantly, you'll begin taking depreciation deductions that reduce your basis, and appreciation above the stepped-up basis accumulates as future taxable gain. Unless you have a specific long-term investment strategy, holding an inherited Texas home as a rental typically costs more in tax and complexity than selling promptly.

Can the stepped-up basis be lost or reduced?

Yes, in some situations. If the estate is subject to federal estate tax and uses alternate valuation date (6 months after death), the basis is set at that later value. Also, if an heir receives property as a bequest in exchange for services rather than as a pure inheritance, the IRS may challenge the step-up. These are uncommon scenarios — discuss with your estate attorney.

Sell While the Tax Advantage Is at Its Peak

The stepped-up basis advantage is greatest immediately after death and erodes with every month of market appreciation. A cash sale closes in 14–30 days — before the market moves and while your tax position is optimal.

Related Articles:

• Complete Texas Probate Guide for DFW Heirs
• When Heirs Can't Agree: Selling With Multiple Owners
• Managing and Selling an Inherited DFW Home Out of State
• Inherited House With Tenants in Texas