A 78-Year-Old's $1.2 Million Inherited Family Home Faces a $190,000 Capital Gains Surprise When the Heirs Missed the Step-Up

"A 78-year-old at the center of this scenario inherited her parents' home jointly with two siblings eight years ago, when the property was worth roughly $1.2 million. Nobody ordered a date-of-death appraisal. Now the siblings want to sell at $1.45 million, and the IRS still has the original $80,000 purchase price from 1972 as the cost basis. That single oversight has turned a routine sale into a roughly six-figure tax mess."

"Under IRC Section 1014, inherited property gets its cost basis "stepped up" to fair market value on the date of death. That single rule is the most valuable tax provision that most middle-class families ever touch. Decades of appreciation, fueled in part by inflation that has pushed the CPI to 330.3 and a housing market still running at 1.50 million annualized starts, simply disappear for tax purposes."

"An adult child clears out a parent's house, sells within a year or two, and assumes the basis "resets" automatically. Sometimes it does. Often, without an appraisal in the file, the IRS defaults to whatever paperwork it can find, which is usually the original deed."

"The decision in front of the family: sell now and absorb the tax bill, or pause to restructure the basis paperwork first. The math here is brutal when the step-up is missed. Compare the two paths on a $1.45 million sale: The avoidable damage runs roughly $89,000"

A 78-year-old inherited a home jointly with two siblings eight years ago, when the property was worth about $1.2 million. No date-of-death appraisal was obtained. The siblings now plan to sell for about $1.45 million, but the IRS is using the parents’ 1972 purchase price of $80,000 as the cost basis. Without the appraisal, the IRS may rely on existing paperwork such as the deed, preventing the inherited-property step-up. Under IRC Section 1014, inherited property generally receives a stepped-up cost basis to fair market value on the date of death. Missing that step can turn a routine sale into a roughly six-figure tax problem.

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