Heirs selling an inherited house or rental in the Detroit area usually owe far less capital gains tax than they expect, because inherited property generally receives a stepped-up basis equal to its fair market value on the date of the original owner's death. That single rule changes the math more than almost anything else in this area of tax planning, but it does not make every inherited sale tax-free, and there are situations where it helps less than heirs assume.
How the Stepped-Up Basis Actually Works
Instead of inheriting the decedent's original purchase price and depreciation history, the heir's basis resets to the property's appraised value at the date of death, or in some cases an alternate valuation date six months later. A house a parent bought decades ago in northwest Detroit for a modest sum, but that was worth substantially more at the time of death, passes to the heirs with basis equal to that higher death-date value, largely erasing the gain that would have applied if the parent had sold it directly.
Where the Step-Up Does Not Erase Everything
Gain can still accrue between the date of death and the date the heirs actually sell, if the property's value rises during that period, or if the estate or heirs claim depreciation on the property while renting it out before selling. An inherited duplex held and rented for two years by the heirs before sale will generate its own smaller round of gain and possibly its own depreciation recapture on top of the stepped-up basis, which is a detail heirs sometimes miss.
Getting the Date-of-Death Valuation Documented
The stepped-up basis only works cleanly if there is a defensible appraisal or comparable-sales analysis pinned to the date of death, and estates that skip this step often end up reconstructing the value years later under worse conditions. Ordering an appraisal close to the date of death, even before probate finishes, is worth doing regardless of whether the heirs plan to sell right away or hold the property for a while first.
If the Heirs Want to Defer Rather Than Sell Outright
If heirs decide to hold and rent the inherited property for a period and later sell, any gain that accrued after the step-up date, along with recapture from depreciation the heirs claimed, can potentially be deferred through a 1031 exchange into new investment property, run through a qualified intermediary under the standard timing rules. This applies to the post-inheritance gain, not to value that existed at the date of death, since that portion was already addressed by the step-up.
Multiple Heirs Complicate the Timeline
When a property passes to several siblings or heirs who disagree about selling immediately versus holding, the delay itself can generate additional taxable gain if the market moves before a decision is finalized, and it can also affect who is eligible to participate in an exchange if only some heirs want to reinvest. Getting the estate's tax advisor involved before the property is listed helps avoid a sale that surprises one heir with a bill they did not expect relative to the others.
Common 1031 Exchange Questions
Do I owe capital gains tax on a house I inherited and sold right away?
Often very little, since the stepped-up basis resets to the property's value at the date of death, and a quick sale usually shows only minor appreciation, if any, between that date and the closing.
What if we don't get an appraisal until years after the death?
A defensible date-of-death value can sometimes be reconstructed later using historical comparable sales, but it is harder and less reliable than an appraisal ordered near the time of death. Ordering one early avoids that problem.
Does depreciation recapture apply to inherited property?
Not on the pre-inheritance history, since the stepped-up basis effectively resets that. It can apply to depreciation the heirs themselves claim if they later rent the property out before selling.
Can heirs do a 1031 exchange on inherited property?
Yes, on any gain and recapture that accrues after inheritance if the property is held for investment or business use, run through a qualified intermediary under the standard exchange timing rules.
What happens if some heirs want to sell and others want to exchange into new property?
Each heir's share generally needs to be handled according to their own goals, which can mean one portion sells outright while another portion moves into an exchange; this needs coordination with the estate's tax advisor before listing.
