Contributed by: BreeS, FreeTaxUSA Agent
This article focuses on the tax implications of selling an inherited home with multiple heirs after the original owner has passed away.
When a home is inherited by multiple individuals and then sold, reporting the sale on your tax return can seem complicated. Fortunately, it doesn’t have to be.
What happens when you inherit a house or other assets?
Inherited property is treated differently for capital gains purposes than non-inherited property. When you sell non-inherited assets, your basis is typically the purchase price. When you sell inherited assets, the IRS gives you what’s called a stepped-up basis.
This means you generally use the asset’s fair market value (FMV) on the date of the original owner’s death instead of what they originally paid for it.
How to address an inherited home with multiple heirs
The first step is to determine the stepped-up basis, which is the FMV of the house at the time of death. If you sold the house right away, the stepped-up basis and FMV at the time of sale may be the same. However, it’s best to get an appraisal at the time of death or within 6 months of that date to establish the stepped-up basis.
If you didn’t sell the house right away, you’ll need additional effort to calculate the earlier FMV. You might review county property tax records to see what the county valued the house at or consider hiring a real estate agent to identify comparable houses sold around the time of inheritance.
Once you have the FMV, determine how the proceeds were disbursed. Did everyone receive an equal share, or were the proceeds distributed differently?
Next, calculate each heir's percentage of total proceeds by dividing their share by the total. Be sure to account for selling expenses such as real estate commissions or closing costs.
After calculating each heir’s percentage, apply that percentage to the stepped-up basis (FMV at the time of death). The result is each heir's new basis for reporting the inheritance.
Examples:
Example 1
Gloria passed away in August 2025 and left her home to her three adult children. They decided to sell the house immediately, and it sold for $600,000. They divided the proceeds from the sale unevenly: one child received a 40% share, and the other two received a 30% share.
This means two children each received $180,000 (30% of $600,000), and one child received $240,000 (40% of $600,000). In this situation, each child’s stepped-up basis equals their share of the sale proceeds. Therefore, there would generally be no capital gain to report.
Example 2
Marilyn passed away in August 2023 and left her home to her three adult children to divide equally. The siblings had the forethought to appraise the house at the time of her death, and it was valued at $540,000. In 2025, the siblings agreed to sell the house, and it sold for $600,000. They had selling expenses of $2,100.
Since they’re dividing the inheritance equally, each sibling’s stepped-up basis is $540,000 / 3 = $180,000.
The sale proceeds and selling expenses will also be divided equally:
$600,000 / 3 = $200,000 sale proceeds per sibling
$2,100 / 3 = $700 selling expenses per sibling
To determine their taxable gain in this situation, each sibling should subtract their stepped-up basis from their proceeds and factor in any selling expenses as follows:
$200,000 - $180,000 - $700 = $19,300 taxable gain per sibling
💡Note: You may have a capital loss if you sell the home for less than your stepped-up basis, provided you sold it to an unrelated person and you never used it for personal purposes after inheritance. Enter your stepped-up basis and the sale price using the same steps in the following section, and the software will calculate your capital loss and apply it to your return.
How to enter an inherited home sale in FreeTaxUSA
When a home is sold soon after it's inherited, there may not be any capital gain after selling expenses are taken into consideration if the sale price is close to the home's FMV on the date of death. However, if you received Form 1099-S for the sale, you'll still need to report the transaction on your tax return.
If the home increases in value after you inherit it, as in Example 2, you'll need to report the sale and calculate any resulting capital gain. Follow these steps in your account:
Start here: Follow the menu path: Income > Common Income > Investments and Savings
- Select Add Investment
- Select Other Sales and click Save and Continue
- Enter who brokered the sale
- Select Other for the type of sale
- Click One at a time
- Select the option that applies to you and any document you may have received
- Enter a brief Investment Description, include the address of the home
- Click No when asked Did you acquire this investment on a specific date? Then select “inherited”
- Date acquired is the date the person passed away.
- Sale proceeds are your share of the proceeds. If you received Form 1099-S, enter your share of the amount from Box 2. If you didn't receive Form 1099-S, enter your share of the gross proceeds minus your share of the selling expenses.
- Cost basis is your share of the stepped-up basis.
Using Example 2 from above and assuming Form 1099-S was issued for the sale, the entries will look like this:
Conclusion
While selling an inherited house with multiple heirs can seem complicated, it's simply a matter of determining the FMV at the time of death, calculating each heir’s percentage of proceeds, and reporting the sale with the stepped-up basis.
You may not need to enter the sale if no Form 1099-S was issued and the FMV at the time of death equals the sale proceeds (meaning there’s no capital gain or loss). However, if Form 1099-S was issued or if the FMV differs from the sale proceeds, each heir will need to report the sale on their individual tax return using their portion of the stepped-up basis and sale proceeds.