Capital Gains Tax on Inherited Property

When a Jacksonville-area resident inherits real estate, the property generally receives a stepped-up cost basis equal to its fair market value on the date of the original owner's death, rather than carrying over the decedent's original purchase price and depreciation history. This step-up in basis is one of the most significant tax benefits available under current federal law, because it can eliminate decades of accumulated appreciation and depreciation recapture that would otherwise have been taxable if the original owner had sold the property during life. An heir who sells the inherited property shortly after death, at close to the appraised value, may owe little or no capital gains tax at all.

The stepped-up basis rule applies whether the property passes through a will, a revocable living trust, or intestate succession, and it applies to rental property, vacant land, and commercial real estate located anywhere, including property in Duval, Clay, St. Johns, or Nassau counties. Establishing the correct date-of-death value typically requires a qualified appraisal or, in some cases, comparable sales data from around the date of death, and heirs should retain this documentation, since the Internal Revenue Service can request support for the basis used if the property is later sold. All inherited real property is treated as held long-term for capital gains purposes, regardless of how long the heir personally owns it before selling, which means favorable long-term capital gains rates apply even to a quick resale.

Gain on an inherited property sale is calculated the same way as any other capital asset: sale price minus selling costs and adjusted basis, with the stepped-up value as the starting basis rather than the original purchase price. If the property continued to appreciate between the date of death and the date of sale, that additional appreciation is taxable, and if the heirs used the property as a rental and claimed depreciation after inheriting it, that depreciation is subject to recapture in the same way it would be for any other rental property. Florida's lack of a state income tax means Jacksonville-area heirs face only the federal capital gains and recapture rules, without a layer of state tax on top.

Heirs who want to hold and continue operating an inherited rental or commercial property, rather than sell it outright, retain full access to a 1031 exchange on any future sale, using the stepped-up basis as the new starting point. This can be a useful strategy for a family that inherits a property with deferred maintenance or in a location the heirs no longer want to manage directly, since the heirs can sell and exchange into replacement property, such as a Delaware Statutory Trust interest or a professionally managed asset, without paying tax on appreciation that occurred after the date of death, provided they otherwise satisfy the standard 1031 identification and closing timelines.