Step-Up in Basis on Inherited Texas Property Explained

Losing a parent or spouse is hard enough without trying to decode the tax code at the same time. The good news is that one of the most generous rules in the entire tax code — the step-up in basis — usually works in your favor when you inherit a Texas home.

What “Basis” Means in Plain English

Basis is what the IRS treats as your cost in a property. When you sell, you owe capital gains tax on the difference between the sale price and your basis.

If your parents bought their Austin house in 1985 for $80,000, that $80,000 was their basis. If they had sold it for $500,000 before they died, they would have owed capital gains tax on roughly $420,000 of profit.

When you inherit the same house, the IRS resets the basis to the fair market value on the date of death. That reset is the step-up in basis, and it can wipe out decades of appreciation.

How the Step-Up Works on an Inherited Texas Home

The rule is in Internal Revenue Code § 1014. On the date of death, the cost basis of inherited property is replaced by its fair market value. That new number becomes your basis going forward.

A quick example. Your father bought a home in Round Rock in 1992 for $110,000. He died in early 2026 when the home was worth $475,000. You inherit the home with a new stepped-up basis of $475,000.

• If you sell six weeks later for $480,000, your taxable gain is $5,000 — not $370,000.
• If you sell two years later for $520,000, your taxable gain is $45,000 — only the appreciation that happened after his death.
• If you sell for $475,000 or less, your federal capital gain is $0.

This is why so many families who sell inherited Texas property soon after death end up owing little or no federal capital gains tax. For a broader look at the tax picture, read what taxes do you owe when selling an inherited house in Texas.

The Texas Community Property Double Step-Up

Texas is one of nine community property states, and that designation creates one of the biggest tax advantages in the country for surviving spouses.

In most states, when a spouse dies, only the deceased spouse’s half of the home gets a stepped-up basis. The surviving spouse keeps their original cost basis on their half.

In Texas, both halves of community property get a step-up when the first spouse dies. The surviving spouse owns a home with a basis equal to 100% of its date-of-death fair market value.

Here is what that looks like in practice. A couple bought a Houston home in 1995 for $140,000. They held it as community property. The husband dies in 2026 when the home is worth $520,000.

If the surviving wife sells the Houston home a few months later for $530,000, she owes capital gains on $10,000 in Texas — versus $200,000 in a common-law state. That is a real, federal, no-loophole difference worth tens of thousands of dollars.

Two notes on the double step-up:

• The property must have been held as community property, not separate property. Most homes bought during the marriage in Texas qualify. Homes one spouse owned before marriage usually do not.
• A community property survivorship agreement or properly titled deed helps confirm the character of the property.

Why Documenting Date-of-Death Value Matters

The step-up is only as strong as your proof of fair market value on the date of death. If the IRS ever questions your basis, you need a defensible number.

You have a few options, ranked from strongest to weakest:

1. Formal date-of-death appraisal from a licensed Texas appraiser. This is the gold standard. It costs $400–$700 in most metros and produces a written report the IRS rarely challenges.
2. Broker price opinion or comparative market analysis (CMA) from a real estate professional. Useful as a sanity check, but weaker than a formal appraisal in an audit.
3. County appraisal district value. Free and easy to pull, but Texas appraisal district values often lag the real market by 10–25%. Use as a last resort, not a first choice.
4. Pulled comparable sales from public records. Acceptable for very small estates, but light on documentation.

If you might keep the property for a while before selling, get the formal appraisal. Memories fade, comps disappear, and the IRS has up to three years (sometimes six) to question your return.

If you’re juggling probate paperwork and trying to figure out whether you need a formal date-of-death appraisal or whether a CMA is enough for your situation, that’s exactly what our free consultation is for. We can walk you through the options and connect you with a licensed Texas appraiser if one makes sense. Reach out through our contact form and we’ll respond within one business day.

When the Step-Up Won’t Save You From All Taxes

The step-up resets the basis on the date of death, but capital gains can still grow after that date if you hold the property.

You may owe federal capital gains tax when:

• You hold the property for several years and it appreciates well beyond the date-of-death value
• You make improvements and recover that cost through a higher sale price
• You convert the inherited home to a rental and depreciate it (more on that below)
• You sell at a price the IRS considers below fair market in a related-party transaction

Texas has no state income tax, so federal capital gains tax is usually the only capital gains tax you’ll face on a Texas home sale. Long-term capital gains rates are 0%, 15%, or 20% depending on your total income.

Inherited a Rental Property? Depreciation Recapture Matters

If the deceased used the property as a rental and claimed depreciation, things get more complicated — but in a way that often helps the heir.

When you inherit a rental:

• The basis resets to date-of-death fair market value, just like any other inherited property.
• The prior depreciation goes away from your perspective. You don’t owe depreciation recapture on depreciation the previous owner took.
• Your depreciation clock starts over. You can depreciate the stepped-up value over 27.5 years (residential) if you continue to rent it.
• If you sell later, any depreciation you (the heir) took during your ownership will be subject to recapture at up to 25%.

This is one of the strongest arguments for getting a clean date-of-death appraisal even if you plan to keep the property as a rental for a few years.

IRS Form 8971 and Basis Consistency Rules

Larger estates have a reporting requirement most families never hear about. If a federal estate tax return (Form 706) is filed — which only happens for estates above the federal exemption, around $13.6 million in 2026 — the executor must file IRS Form 8971 and provide each beneficiary a Schedule A showing their basis in inherited property.

The rule, in plain English: the value reported to the IRS for estate tax purposes is the basis the beneficiary must use when they sell. You cannot claim a higher basis than what was reported on the estate tax return.

For the vast majority of Texas families, no Form 706 is required and Form 8971 never comes into play. But if you’re dealing with a large estate, this is one more reason to coordinate the appraisal and reporting before anyone sells.

How This Plays Into the Sale Process

The step-up in basis is one reason so many families sell inherited Texas property within a year or two of death. The closer you sell to the date-of-death value, the lower your federal capital gain.

That doesn’t mean rushing is always right. Sometimes there are good reasons to hold — emotional, practical, or financial. But if you’re already planning to sell, understanding the tax math can take pressure off the timing.

For a step-by-step look at how a probate sale actually works in Texas, see the Texas probate property sale process and our overview of selling inherited property in Texas.

If the property is in central Texas, our Travis County probate guide walks through the local court timelines and market conditions.

Quick Recap

• Step-up in basis resets your cost basis to the fair market value on the date of death.
• Texas community property gets a full double step-up — a major advantage for surviving spouses.
• A formal date-of-death appraisal is the strongest documentation if you ever face IRS questions.
• Selling soon after death often means little or no federal capital gains tax.
• Depreciation recapture only applies to depreciation you took as the heir, not the prior owner.

The step-up is one of the few tax rules genuinely designed to help families through a hard time. The more carefully you document the date-of-death value, the more of that benefit you keep.