Basis

• Basis is the original cost of an asset that is used to calculate any profit upon the sale of said asset and any capital gains tax owed. Knowing the basis will help you determine if income from the sale of your inherited property is taxable. For example, your grandmother purchased her home for $150,000, and the fair market value of the property on the day of her death is $225,000. If you inherit the property and sell it for $225,000 you do not incur any capital gains taxes. This is known as a "stepped-up" basis, as the original basis (cost) for the property is stepped up to the current value at the time of your grandmother's death.
  
  

Capital Gains

• If you sell your inherited property for more than the basis, to calculate the amount of your capital gain, subtract the basis and all selling costs and fees from the sale price of the property. In other words, if you find a buyer who is willing to pay $250,000 for your grandmother's home, you would have a capital gain of roughly $25,000 ($250,000 - $225,000 plus selling costs). If you realize this capital gain by selling the property less than one year after inheriting it, you will pay the ordinary income tax rate you usually pay. If you wait more than one year (long-term capital gains tax) to sell the property, you would pay 10 percent (15 percent income tax bracket) to 20 percent (all other tax brackets) on the $25,000 gain.
  
  

Alternate Valuation

• If the executor (representative) of a decedent's estate chooses to use the alternate valuation method for determining the value of the decedent's assets, it may change the basis of your inherited property. The basis would be the fair market value on the alternative valuation date, which is the date six months after the decedent's death, or on the date you sell the property if it is within that six-month period. The downside to this method is that your inherited property could be worth less. On the positive side, this could mean less chance of owing any capital gains tax if you sell it.
  
  

Exemptions

• If you decide to hang onto your inherited property, you may eventually qualify for a capital gains income tax exemption when you sell the property. It is possible to qualify for an exemption on capital gains of up $250,000 if you file "single" on your tax return or up to $500,000 if you file as "married filing jointly." To qualify, you must own the home for at least two of the five years prior to the sale date of the property, and you must have lived in the home as your primary residence for a minimum of two years out of the five.