Inheriting a house can be financially significant — and confusing. One of the most common questions we get from heirs is: “Will I owe capital gains tax when I sell?” The good news is the U.S. tax code is unusually generous to people who inherit property. Most heirs owe little or nothing in capital gains tax when they sell within a reasonable time.
This guide explains exactly how the math works for Illinois heirs in 2026, including the “step-up in basis” rule that’s the cornerstone of inherited-property taxation. Always confirm with a CPA — but this gives you the framework.
Step-Up in Basis: The Big One
When you inherit a house, your “cost basis” for tax purposes is reset to the fair market value on the date of the original owner’s death. This is called the “step-up in basis.”
Example: Your parent bought the house in 1985 for $80,000. They died in March 2026 when the house was worth $320,000. You inherit it. Your cost basis is $320,000 — not $80,000.
If you sell six months later for $325,000, your taxable capital gain is only $5,000 ($325K sale – $320K stepped-up basis). All the appreciation from 1985 to 2026 is wiped out for tax purposes.
How to Establish the Stepped-Up Value
You need documentation showing fair market value on the date of death. Acceptable evidence:
- Professional appraisal dated as close to date of death as possible (best)
- Cook County or other county assessor’s market value for that year (acceptable)
- Comparable sales analysis from a realtor (acceptable but weaker)
Keep this documentation forever. If the IRS audits, you’ll need to prove the stepped-up basis.
Alternate Valuation Date
The estate can elect to value all assets six months after the date of death (the “alternate valuation date”) instead of the date of death — but only if doing so reduces both the gross estate value AND the estate tax. For most middle-class estates this election doesn’t apply since they’re below the federal exemption ($13.99M individual / $27.98M couple in 2026).
Federal Capital Gains Rates
Inherited property is automatically treated as long-term capital gains, regardless of how long you actually held it. 2026 long-term capital gains rates:
- 0% if your total taxable income is under $48,350 (single) / $96,700 (married filing jointly)
- 15% for most middle-income heirs
- 20% if total taxable income exceeds $533,400 (single) / $600,050 (married filing jointly)
An additional 3.8% Net Investment Income Tax (NIIT) may apply for high earners.
Illinois State Tax
Illinois has a flat 4.95% income tax rate. Capital gains are taxed at the same rate as ordinary income for Illinois purposes. So if you owe federal capital gains tax, you owe 4.95% Illinois tax on the same gain.
Illinois does not have a separate inheritance tax (it does have an estate tax, but that’s paid by the estate before distribution, not by heirs).
Selling at a Loss
If you sell the inherited house for less than the stepped-up basis, you have a capital loss. This loss can offset other capital gains for the year, and up to $3,000 of ordinary income. Unused losses carry forward.
Real estate market values can drop between date of death and date of sale. If the house was appraised at $320K but the market softens and you sell for $295K six months later, you have a $25K capital loss that may save you several thousand dollars in other taxes.
Renting vs Selling
If you hold the inherited property and rent it out before selling later, two tax consequences kick in:
- Depreciation recapture. You’ll claim depreciation deductions during the rental years, which reduce your basis. When you sell, the recaptured depreciation is taxed at up to 25%.
- No primary-residence exclusion. The $250K/$500K primary-residence exclusion only applies if you’ve lived in the home 2 of the last 5 years.
Holding and renting is a fine strategy, but it makes the tax calculation more complex.
Reporting Requirements
When you sell an inherited house, you report it on Form 8949 and Schedule D of your federal return. The 1099-S from the closing attorney goes to the IRS — they know you sold. Make sure your tax preparer has the date-of-death appraisal so they can correctly report the stepped-up basis.
See our Cook County inherited house guide for the selling process itself.
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This article is for general information only and is not legal, tax, or financial advice. Always consult a qualified attorney, CPA, or financial advisor for your specific situation.