Inheriting property from a loved one can be a powerful gift—and a complex financial experience. For residents of Mesa or Queen Creek, AZ, understanding how capital gains taxes work on inherited property can help you make smart choices about when and how to sell what you’ve received. Whether you’ve inherited a home, investments, or other valuable assets, knowing how taxes apply is essential to managing your financial future wisely.
What Happens When You Inherit Property?
When someone passes away and leaves you property—like a house, land, or stocks—you generally don’t owe taxes right away. The IRS doesn’t tax you just for receiving an inheritance. But taxes may come into play later, especially if you decide to sell that property. That’s where capital gains taxes enter the picture.
The key concept here is the “step-up” in cost basis. This tax rule resets the property’s value to its fair market value at the time the original owner passed away. Let’s look at how that works.
What Is a Step-Up in Basis?
Let’s say your grandmother bought her Queen Creek home decades ago for $100,000. Today, it’s worth $600,000. If she sold the home while she was alive, she might have owed taxes on the $500,000 in profit.
But if she passes the home on to you, and you sell it immediately for $600,000, you won’t owe capital gains taxes—because your new “cost basis” would be $600,000, if you qualify for a step-up in basis, the fair market value on the date of her death. There’s no profit to tax.
However, if you hold on to the property and its value increases—say to $700,000—and then you sell it, you may owe capital gains taxes on the $100,000 increase since the date of inheritance.
What Taxes Apply When Inherited Property Is Sold?
Capital gains taxes are triggered when you sell inherited property for more than the value it had when you received it. Here’s how it works in practice:
- Determine the fair market value (FMV) of the inherited property on the date of death.
- Sell the property.
- Subtract the FMV from the sale price. The difference is your capital gain—and that’s the amount subject to tax.
If you sell the property for less than its FMV, you could even report a capital loss, which might reduce your overall tax bill.
Are You Always Eligible for a Step-Up in Basis?
Most inherited property—including homes, investments like stocks and mutual funds, and even collectibles—receives a step-up in basis. However, not all assets qualify.
Assets held in tax-deferred accounts, like IRAs or 401(k)s, do not receive a step-up in basis. These accounts are taxed differently, typically as ordinary income when withdrawn. If you inherit one of these, it’s best to talk with a tax or financial advisor.
Do You Have to Pay Inheritance or Estate Taxes in Arizona?
Here’s the good news for Queen Creek residents: Arizona does not have a state inheritance tax. And since there’s no federal inheritance tax, you won’t owe a tax just for receiving property.
Estate taxes, on the other hand, are paid by the estate before assets are passed to heirs. In 2025, the federal estate tax only applies to estates worth more than $13.99 million ($27.98 million for married couples). So, most people won’t be affected.
Still, it’s important to understand the difference:
- Inheritance Tax: Paid by the person receiving the inheritance (not applicable in AZ).
- Estate Tax: Paid by the estate before distribution (applies only to very large estates).
- Capital Gains Tax: Paid by the heir when inherited property is sold for a gain.
What If You Own Inherited Property Jointly?
If you inherit property jointly with siblings or other relatives, the step-up in basis still applies. Each co-owner is responsible for paying capital gains tax based on their share when the property is sold.
For example, if you and your sister inherit your parents’ Queen Creek home, you each own 50%. If the property gains value before you sell it, capital gains are split equally between you. It’s important to coordinate with co-owners about timing, sale terms, and tax planning.
What If the Property Keeps Gaining Value?
Holding onto inherited property can be a smart decision—but it can also create a future tax liability. If the property appreciates in value after you inherit it, you’ll owe capital gains taxes on that increase when you sell.
For example:
- Inherited fair market value (FMV) at date of death: $600,000
- Sold five years later for: $750,000
- Taxable capital gains: $150,000
Even though you benefited from the step-up in basis at the time of inheritance, appreciation after that point still matters.
Can You Avoid Paying Taxes on Inherited Property in Queen Creek?
While the step-up in basis already reduces much of your potential tax burden, there are limited ways to avoid capital gains altogether. One common way is to sell the property shortly after inheriting it, before it has a chance to increase in value.
You might also consider other strategies depending on your long-term financial goals, such as converting the property to a rental or gifting it. However, these choices come with their own tax rules, so be sure to consult with a tax or estate planning professional before making a decision. Read more in our article, Can Estate Planning Reduce Taxes?
Work with a Queen Creek Estate Planning Attorney to Plan for Inherited Property
Understanding how capital gains taxes work with inherited property is just one part of the larger estate planning puzzle. If you’re inheriting or preparing to pass down property in Queen Creek, AZ, working with an experienced estate planning attorney can help ensure everything is structured to minimize taxes and preserve value for your loved ones.
At LifePlan Legal AZ, we guide families through the estate planning process with clarity and compassion. Whether you’re managing an inheritance or planning your own legacy, schedule a strategy session with LifePlan Legal AZ online for guidance every step of the way.
References: Thrivent (Nov. 6, 2024) “How does the capital gains tax on inherited property work?”
