How to Legally Avoid Capital Gains on Inheritance (2025 Guide)

That phone call usually starts with a heavy heart, but then a wave of questions hits: “Michael, Dad left me the house and his stock portfolio. I’m grateful, of course, but now what? Am I going to get slammed with taxes when I try to do anything with it?” It’s a scenario I’ve walked through with clients countless times over my 25+ years as a financial planner.

Inheriting assets, whether it’s the family home or a chunk of investments, is often a bittersweet cocktail of emotion and financial bewilderment. The biggest fear I always heard? “Am I going to lose a huge chunk of this to Uncle Sam?”

Let’s cut through the noise and the myths. While there’s no federal “inheritance tax” per se (only a few states levy one, and we’ll touch on that), the real bogeyman for most heirs is federal capital gains tax when they eventually sell those inherited assets.

Am I going to be slammed with taxes? Not if you understand the rules.

But here’s the good news, and it’s something I’ve built entire strategies around for clients: with smart, proactive planning, you can often significantly reduce, or in some cases, completely avoid paying capital gains tax on what you’ve inherited. This isn’t about shady loopholes; it’s about understanding and legally leveraging the tax code for 2025 and beyond.

This isn’t just a list of rules; this is my frontline playbook, refined over decades, designed to help you keep more of your hard-earned (or hard-inherited) wealth. If you need a primer on whether an inheritance is taxable in the first place, that’s a good starting point.

Inherited Assets & Taxes? Get Your Quick Clarity & Strategy Snapshot!

Before we dive deep into the six battle-tested strategies, let’s quickly orient you. Select what you’ve inherited and your initial thoughts below to see the immediate impact of the ‘stepped-up basis’ and which parts of this guide might be most critical for you.

The Golden Key: Understanding “Stepped-Up Basis” for Inherited Assets in 2025

If there’s one concept that is absolutely critical to grasp when you inherit any appreciable asset (a house, stocks, mutual funds, even valuable artwork), it’s the stepped-up basis. This isn’t just tax jargon, Michael Ryan speaking here, this is your golden key to potentially saving thousands, even hundreds of thousands, in capital gains taxes.

What Exactly Is This Magical Step-Up?

In plain English: when you inherit an asset, the IRS allows its cost basis (the starting value for determining profit or loss when you sell) to be “stepped up” to its fair market value (FMV) on the date of the original owner’s death. (There’s an alternative valuation date six months later, but it’s less commonly used for typical inheritances).

“The stepped-up basis rule is crucial for inherited property taxation,” as noted by financial experts at Taxes for Expats. “This provision resets the property’s tax basis to its fair market value at the time of the previous owner’s death, essentially wiping out any gains that occurred during their ownership.”

My Client “Maria” & the $300,000 Tax Eraser – A Stepped-Up Basis Story)

Let me tell you about Maria. Her father bought a small rental property in a growing Texas neighborhood back in 1990 for $80,000. He passed away in early 2025, leaving it to her. By then, due to massive appreciation, the property was appraised at $380,000 on his date of death.

• Dad’s Original Cost Basis: $80,000
• Maria’s Stepped-Up Basis: $380,000
• That $300,000 increase in value during her father’s lifetime? Poof!

For Maria’s capital gains calculation, it was like it never happened. If Maria sold that rental property immediately for $380,000, her taxable capital gain would be $0. This is the power of the step-up.

Without it, she’d be looking at a $300,000 gain, potentially taxed at 15-20% plus Net Investment Income Tax! That’s a $45,000-$60,000+ tax bill avoided. For a deeper dive into this specific area, my article on capital gains tax on inherited property has more examples.

Michael’s Pro Tip: “Never, ever skip getting a formal, professional appraisal for real estate or a detailed valuation for significant investment portfolios as of the date of death. A Zestimate or your cousin Vinnie’s opinion won’t cut it with the IRS. That appraisal document is your shield.”

• How is cost basis calculated on an inherited asset?
• Capital Gains on Inherited Real Estate

Six Battle-Tested Strategies to Minimize (or Skip!) Capital Gains Tax on Your Inheritance in 2025/2026

Okay, the stepped-up basis is your fantastic starting point. But what if you hold onto the asset and it appreciates further? Or what if you have other strategic goals? Here are six strategies I’ve consistently used with clients to navigate these waters, updated for the 2025/2026 tax environment.

Strategy #1: The “Quick Sale” – Leveraging Peak Stepped-Up Value)

This is the most straightforward. As Greenback Tax Services often advises clients, “If you sell the property shortly after inheriting it, any capital gain should be minimal, as there will likely be little to no appreciation in value [beyond the stepped-up basis].”

Michael’s Take: 
“If you don’t want to be a landlord, or the inherited stocks don’t fit your investment strategy, a relatively quick sale (within a few months to a year, depending on market conditions) often means you’re selling very close to that stepped-up fair market value. Result? Little to no capital gain, little to no tax.

I had a client, ‘James,’ who inherited a diverse stock portfolio. We assessed it, sold off positions that didn’t align with his goals within six months, and his capital gains tax was negligible due to the step-up and minimal appreciation in that short window.” This strategy is simple and clean.

Strategy #2: The “Homestead Switch” – Making it Your Primary Residence

This one requires more commitment but can offer huge savings, especially for inherited real estate. If you move into the inherited house and make it your primary residence for at least two out of the five years before you sell it, you can qualify for the Home Sale Exclusion.

The Payoff (2025/2026 Projections): 

This allows you to exclude up to $250,000 of capital gains from your taxable income if you’re single, or up to $500,000 if you’re married filing jointly. [Source: IRS Publication 523, Selling Your Home – these exclusion amounts are long-standing but always verify for the tax year of sale].

My Client “Linda’s” Story: 

Linda inherited her aunt’s condo, which had a stepped-up basis of $400,000. It needed some work, but was in a desirable area. She was renting at the time. She decided to move in, spent two and a half years fixing it up while living there, and then sold it for $725,000. Her gain was $325,000.

As a single filer, she excluded $250,000 of that gain, only paying capital gains tax on $75,000. That saved her nearly $40,000 in taxes! If you’re considering this, my article on how to avoid capital gains tax on a home sale offers broader insights.

A Common Reddit Question I See: 

“My parents added me to the deed of their house years ago. Do I still get a full stepped-up basis on the whole house when they pass?” 

Michael’s Answer: 
This is a HUGE one, and the answer is often “No, not on the portion gifted to you while they were alive.” If you were gifted a portion of the house (e.g., added to the deed as a joint tenant with right of survivorship not solely for convenience), you typically get their original (lower) cost basis for that share.
Only the portion actually inherited at death gets the step-up. This is a classic example of well-intentioned estate planning moves sometimes backfiring on the capital gains front for heirs. It’s far cleaner if the property passes fully through the estate to get the full step-up.

Strategy #3: The “Investor’s Shuffle” – Using a 1031 Exchange (for Investment Properties Only)

If you’ve inherited an investment property (like a rental unit) and plan to stay in the real estate investment game, a 1031 exchange can be your friend.

The Gist: 
As Moravecs Law Offices often explains to clients, “If you plan to reinvest the proceeds from selling the inherited [investment] property into another investment property, you may qualify for a 1031 exchange, which allows you to defer capital gains taxes.”

Michael’s Warning: 
“1031 exchanges have very strict rules: you must identify replacement ‘like-kind’ properties within 45 days of selling the inherited one, and close on the new property within 180 days.
This is not for primary residences, and it defers the tax, it doesn’t eliminate it. I always told clients: treat this like financial surgery – you need a specialist (a Qualified Intermediary) and precise timing.”

Strategy #4: The “Offset Play” – Strategic Tax-Loss Harvesting

This is about looking at your entire financial picture. If you have other investments (stocks, bonds, mutual funds) that currently have unrealized losses, selling those losing investments in the same tax year you realize a gain from selling an inherited asset can be a smart move.

How It Works: 
Capital losses can offset capital gains, dollar for dollar. If your losses exceed your gains, you can even deduct up to $3,000 of the excess loss against your ordinary income each year, carrying forward any remaining losses to future years.

My Client “Tom’s” Timing: 
Tom inherited his mother’s stock portfolio, which had a nice step-up. He planned to sell some shares that had appreciated further since her passing, looking at a $40,000 gain. Simultaneously, he had another non-inherited stock position that was down $30,000. By selling both in the same year, his net taxable capital gain was only $10,000.
This requires active portfolio management and is something I’d frequently discuss during year-end tax planning.

Strategy #5: The “Giveaway Gain” – Donating Appreciated Assets to Charity

For those with a philanthropic heart, donating highly appreciated inherited assets (like stocks or even real estate) directly to a qualified charity can be incredibly tax-efficient for 2025/2026.

The Double Benefit: 

As frequently reported in financial media, “By giving your property [or appreciated stock] to charity, you can bypass the capital gains tax that would normally apply if you sold the asset first and then donated the cash.” Additionally, you may be eligible for a charitable income tax deduction for the full fair market value of the asset at the time of the gift (subject to AGI limits).

Michael Ryan’s Insight: 
“This is a fantastic strategy, especially for assets with a very low stepped-up basis that have appreciated significantly since inheritance. Why sell, pay tax, then donate the rest? Donate the asset directly.
I had a client inherit a small parcel of land that had surprisingly tripled in value in the two years after he inherited it. Donating it directly to his university alumni fund saved him a bundle in capital gains tax and gave him a hefty deduction.” Always get that qualified appraisal for donated property!

Strategy #6: The “Spread & Conquer” – Strategic Timing of Sales Across Tax Years

If you inherit a large portfolio or multiple assets that you plan to liquidate, selling everything in a single tax year could push you into a higher capital gains tax bracket (from 0% to 15%, or 15% to 20%) or trigger the 3.8% Net Investment Income Tax if your income is high enough.

Expert Advice: As tax advisory firm Pie Tax (UK-based, but principle applies universally where tiered capital gains exist) notes, “The key is timing – spreading disposals across different tax years can maximise your tax-free gains [or keep you in lower brackets].”

Michael Ryan’s Approach: 
“For clients with substantial inherited portfolios, we’d often map out a multi-year liquidation strategy. For example, if selling $200,000 worth of stock would push them from the 15% to the 20% capital gains bracket, we might sell $100,000 at the end of December and the other $100,000 in early January of the next year.
This requires careful monitoring of your income and the capital gains tax brackets for 2025 and 2026, as these brackets are inflation-adjusted.” Understanding the difference between asset allocation and diversification can also inform which assets to sell when.

Critical Pitfalls to Dodge in 2025/2026 When Handling Inherited Assets

Knowing what to do is important, but knowing what not to do can save you just as much grief and money.

Failing to Get That Professional Date-of-Death Appraisal: 

I’ve said it before, I’ll say it again. “Make sure the property’s fair market value at the date of death is accurately assessed. Hire a professional appraiser if necessary, as this value will determine the taxable gain when you sell,” advises Moravecs Law. Trying to save a few hundred bucks here can cost you thousands later if the IRS questions your basis.

Sloppy Record-Keeping: 

“Maintain Documentation – Gather appraisals, property records, and estate documents. Keep everything that proves the fair market value and the property’s condition at the time of inheritance,” recommends SDO CPA. For 2025/2026, this means digital copies securely backed up. Include photos, invoices for any post-inheritance improvements, and all estate settlement paperwork. Your future self (and your tax preparer) will thank you.

Misunderstanding Holding Periods (Short-Term vs. Long-Term Gains): 

“In many cases, inherited property is automatically considered to have a long-term holding period regardless of how long you have owned it [after inheritance],” SDO CPA also correctly warns. This is a crucial rule.
Even if you sell an inherited stock two months after you receive it, any gain above the stepped-up basis is typically treated as long-term, qualifying for those lower tax rates. Don’t assume it’s short-term just because your personal holding period was brief.

Forgetting Post-Inheritance Improvements: 

If you invest your own money into improving an inherited property after you inherit it (new roof, remodeled kitchen), those legitimate capital improvement costs increase your adjusted cost basis, thereby reducing your taxable gain when you sell. “Continue collecting receipts for improvements made during your ownership, raising the cost basis,” SDO CPA advises. This is often missed.

Ignoring State-Level Nuances (If Not a Texas Resident Inheriting Texas Property): 

While this article focuses on the Texas advantage (no state inheritance/estate tax and the federal rules for assets located there), if you inherit assets located in one of those six states with an inheritance tax (MD, NE, KY, NJ, PA, IA – though Iowa is phasing its out by 2025 [Source: Iowa Department of Revenue], or if you live in such a state, there can be additional layers.

Always check the rules for the state where the deceased resided and where the property is located, as well as your own state of residence.

My Final Word: Proactive Planning Unlocks Tax Savings on Your Inheritance

Inheriting assets in 2025 or 2026 comes with both opportunities and responsibilities. The tax implications, particularly federal capital gains tax, can be significant, but they are manageable with proactive planning and a clear understanding of the rules. The “stepped-up basis” is your most powerful initial shield.

Beyond that, strategies like living in an inherited home, strategic charitable donations, 1031 exchanges for investment properties, and careful timing of sales can all dramatically reduce your tax liability.

As I’ve echoed for years: “Strategic planning makes all the difference with capital gains tax. We’ve seen the annual CGT allowance [and other strategies] save clients thousands when used wisely.” 

Don’t let the fear of taxes overshadow the significance of your inheritance. Instead, arm yourself with knowledge. If you’re feeling overwhelmed, or if the inheritance involves complex assets or significant value, please don’t try to navigate this alone. Consult with a qualified CPA or tax advisor who specializes in inheritance and estate planning.

For broader financial organization, tools like a net worth calculator can help you see the big picture. The relatively small cost of professional advice can save you immeasurably more in taxes and give you priceless peace of mind. You’ve got this.

• Sharing the article with your friends on social media – and like and follow us there as well.
• Sign up for the FREE personal finance newsletter, and never miss anything again.
• Take a look around the site for other articles that you may enjoy.

Note: The content provided in this article is for informational purposes only and should not be considered as financial or legal advice. Consult with a professional advisor or accountant for personalized guidance.