A lot of people wonder if they have to pay taxes on the capital gains from the increase in the value of a house they inherited.

If you buy a house for $100k in 2020… and now that house is worth $200k in 2024… Normally, you pay taxes on the increase in the value of the house. So because the house increased in value by $100k, you’d be taxed on an $100k gain.

This gets complicated when people inherit a house.

They assume that “Mom bought the house for $100k in 1969… now it’s worth $600k… do I need to pay taxes on $500k??”

The answer is no.

And I’ll explain why.

When you buy a house or buy a stock or buy anything that goes up or down in value that’s called your “basis”

So if you buy a house for $100k, your basis is $100k. Your gain is whatever increase in value before you sell it.

In the case of mom buying a house in 1969 for $100k – that was HER basis in the house.

With an inheritance, you not only inherit the house but you also inherit the basis at the time of your mom’s death. This is called a “stepped up” basis, meaning, the “basis” is “stepped up” to what the house is worth at the time of death.

To further demystify: If the house is worth $600k when your mother dies, that is your basis in the house. It makes no difference what she purchased it for.

So if you get the house at $600k from your mom and sell it for $600k, there are no gains to be taxed on.

Now, if you inherit the house at $600k, and then wait several years and now the house it worth $700k, you have a $100k gain that must be taxed.

This is the same if your mom left you the house in a revocable trust. However, if it was an irrevocable trust, then the house is considered a “completed gift” and you take the basis that was given to the trust.

When it comes to probate, as far as “inheritance” taxes go, an inheritance is only taxed if the value is worth over $2m in Massachusetts, and over $12.9m in Connecticut.