Why the starting value is usually reset
When property passes to you because of someone's death, your tax basis is generally its fair market value at the date of death rather than what the original owner paid. For a house bought decades ago, that adjustment can erase most of the gain that built up during the owner's lifetime. Gain on a later sale is measured from that new value, and inherited property is generally treated as held long-term no matter how soon you sell. If the house was owned jointly, for example with a surviving spouse, only part of it may receive the new value. Property given away during life works differently and usually keeps the giver's original basis, so a house deeded to children before death can carry a much larger tax when it is sold.
Proving the value at death
The date-of-death value is the number everything else depends on, and it should rest on more than a guess. A qualified appraisal as of that date is the usual support, and if an estate tax return was filed, the value reported there may bind or strongly influence the value heirs use. A sale soon after death at an arm's-length price is also evidence of value. Keep records of improvements made after you inherited and of selling expenses such as commissions, since both affect the gain. If the house sells for less than the date-of-death value, a loss is not always deductible, particularly if anyone used the house personally.
Who sells, and from where
The reporting also depends on who is selling. If the estate sells before distributing the house, the gain or loss is generally reported on the estate's income tax return, and how it reaches beneficiaries depends on the estate's distributions. If the heirs sell after taking title, each reports a share. New York does not give capital gains a lower rate for state purposes, and heirs who live outside New York generally face an estimated tax payment at closing on a New York property. We start with the deed history, the probate status in Surrogate's Court, and whether an appraisal exists, then set out how the sale is likely to be reported.
