Texas Stepped-Up Basis: How to Avoid a Massive Tax Bill on Inherited Property
Reviewed by Mark Lee
Inheriting a family home is a life-changing event that brings both a legacy of memories and a heavy slate of financial responsibilities. For many Texans, the most daunting of these responsibilities is the looming threat of the Internal Revenue Service (IRS). Without the right knowledge, heirs can find themselves facing a capital gains tax bill that swallows a massive portion of their family’s hard-earned wealth.
Fortunately, the tax code provides a powerful mechanism known as the stepped-up basis that can virtually eliminate these liabilities. Whether you are an executor managing an estate or an heir looking to move on, understanding how to leverage this rule is essential to protecting your inheritance. In many cases, families find that the most efficient way to capture this value and settle an estate is to sell my house fast Houston to a professional buyer, allowing them to liquidate the asset at its current value without triggering the heavy taxes that plague traditional sales.
In this guide, we will break down exactly how the Texas stepped-up basis works in 2025, the specific IRS rules you must follow, and the strategies you can use to ensure your family’s wealth stays in your pocket rather than the government's.
What is the Stepped-Up Basis Rule in Texas?
To understand the stepped-up basis, you first have to understand "cost basis." In the eyes of the IRS, the cost basis is essentially the price paid for an asset. If your parents bought a house in the Houston Heights for $40,000 in 1975, that $40,000 is their cost basis. If they were to sell it today for $600,000, they would theoretically owe capital gains tax on the $560,000 profit.
However, the rules change completely when a property is inherited. Under Section 1014 of the Internal Revenue Code, the basis of property acquired from a decedent is "stepped up" to its Fair Market Value (FMV) on the date of the owner's death.
How the "Step-Up" Resets Your Tax Clock
Using the example above, if you inherit that same home today and its current market value is $600,000, your new cost basis is not $40,000—it is $600,000. This "step-up" effectively wipes out decades of appreciation. If you were to sell the house immediately for $600,000, your taxable gain would be $0. This is one of the most significant tax advantages available to American homeowners, and in a state like Texas, which already has no state income or inheritance tax, it can result in a completely tax-free transfer of massive wealth.
The Role of Fair Market Value
Fair Market Value is defined as the price at which the property would change hands between a willing buyer and a willing seller. Establishing this value is the most critical step for any heir. The IRS generally requires a professional appraisal to document the FMV as of the date of death. This appraisal serves as your "shield" against future tax audits. For more information on how the federal government views these transfers, you can consult the official IRS guidance on Gifts and Inheritances.
Calculating Your Capital Gains in 2025
While the stepped-up basis resets your starting point, it does not permanently exempt the property from all future taxes. If the property continues to appreciate after you inherit it, you will owe taxes on the new gain.
The Formula for Inherited Property
The math for determining your tax liability is straightforward: [Sale Price] - [Stepped-Up Basis] - [Allowable Deductions] = Taxable Gain
For example, if the stepped-up basis was $600,000 at the time of death, but the Houston real estate market experiences a surge and you sell it a year later for $650,000, you have a $50,000 gain.
Offsetting Gains with Selling Expenses
Many heirs overlook the fact that they can further reduce their tax bill by deducting the costs associated with the sale. These include:
Real estate agent commissions
Title insurance and escrow fees
Home staging and professional photography
Required repairs performed after the date of death to make the home sellable
If those expenses totaled $40,000 in our example, your taxable gain would drop from $50,000 to just $10,000. Depending on your income bracket, this could save you thousands in actual tax dollars.
Community Property Advantages for Texas Spouses
Texas is a "Community Property" state, which provides a unique and powerful advantage for surviving spouses that residents of "Common Law" states do not receive. This is often referred to as a "Double Step-Up."
The "Double Step-Up" Explained
In most states, when a spouse dies, only their 50% interest in the home gets a stepped-up basis. The surviving spouse’s 50% keeps its original basis. However, in Texas, thanks to Texas Community Property Law, the entire property receives a stepped-up basis upon the death of the first spouse.
Scenario: A couple bought a home for $100,000. It is now worth $500,000.
Non-Texas State: Only the deceased spouse's half is stepped up. The new basis is $300,000 ($50k original + $250k stepped up).
Texas: The entire property basis is stepped up to $500,000.
This allow a surviving spouse in Houston to sell the family home immediately and potentially pay zero capital gains tax, even if the home appreciated significantly during their decades of marriage.
Avoiding the "Gift Tax" Trap
A common mistake parents make is "gifting" their home to their children while they are still alive to "avoid probate." While this might save a few thousand dollars in legal fees, it often costs the children hundreds of thousands of dollars in taxes.
Why Gifting is a Bad Financial Move
When you receive a house as a gift during the owner's lifetime, you receive a "Carryover Basis." This means you inherit the original price the parents paid.
If your parents gift you a $600,000 house they bought for $40,000, your basis is $40,000.
When you sell it, you will owe capital gains on the $560,000 profit.
If you had waited to inherit it after their passing, your basis would have been $600,000, and you would owe $0.
By trying to simplify the process, well-meaning parents often accidentally hand their children a massive tax bill. In almost every situation in Texas, it is financially superior to inherit the property through a will, trust, or a Transfer on Death Deed (TODD) rather than receiving it as a lifetime gift.
Strategies to Minimize Taxes if the House Appreciates
If you decide to hold onto the inherited home for several years before selling, and the value increases significantly beyond the stepped-up basis, you still have options to minimize the IRS's cut.
The Primary Residence Exclusion
If you move into the inherited home and make it your primary residence, you can qualify for the Section 121 exclusion. To qualify, you must:
Own the home for at least two years.
Live in the home as your primary residence for at least two of the five years preceding the sale.
If you meet these "Use and Ownership" tests, you can exclude up to $250,000 (single) or $500,000 (married filing jointly) of gain from your income. This exclusion is applied on top of your stepped-up basis, making it possible to sell a highly appreciated property entirely tax-free.
Using the Alternate Valuation Date
In rare cases, the market might dip immediately following a loved one's death. The IRS allows executors to choose an "Alternate Valuation Date" exactly six months after the date of death. This is only beneficial if it reduces the total value of the estate (and thus any potential federal estate tax), but it is a nuance that your tax professional should evaluate if the timing aligns with a market downturn.
Frequently Asked Questions
Do I have to pay Texas inheritance tax?
No. Texas does not have an inheritance tax or a state-level estate tax. As of 2025, the only "death taxes" Texans need to worry about are at the federal level, and even then, they only apply to estates exceeding $13.99 million for individuals (or $27.98 million for married couples).
How do I prove the value of the house at the time of death?
The most robust evidence is a date-of-death appraisal performed by a licensed real estate appraiser. They will look at comparable sales that occurred on or around the date your loved one passed away. A "Broker Price Opinion" (BPO) or a Zestimate is usually not sufficient to satisfy the IRS in an audit.
What if I sell the house for less than the stepped-up basis?
If you sell the house for less than its value on the date of death, you may be able to claim a capital loss. However, the IRS generally only allows you to claim a loss on "investment property." If you or a family member used the home as a personal residence after inheriting it, the IRS may classify it as a personal loss, which is not deductible.
Does a "Transfer on Death Deed" still get a stepped-up basis?
Yes. One of the primary benefits of a Texas Transfer on Death Deed (TODD) is that the property avoids probate but is still considered "acquired from a decedent" for tax purposes. This means the heirs receive the full stepped-up basis just as if they had inherited it through a will.
Can I sell the house while probate is still open?
Yes, an executor or administrator with the "Power of Sale" can sell the property during the probate process. The stepped-up basis still applies. The proceeds from the sale are held in the estate bank account to pay off creditors and eventually distributed to the heirs.
Conclusion: Protecting Your Family’s Legacy
The Texas real estate market has seen incredible growth over the last decade, particularly in the Houston metro area. While this growth is a boon for homeowners, it creates a potential tax trap for heirs who aren't prepared. By understanding the stepped-up basis, you can ensure that the "wealth gap" created by decades of appreciation stays within your family.
Managing an estate is complex, and the tax implications are only one piece of the puzzle. From maintaining a vacant home to navigating sibling disagreements, the process can be overwhelming. If the burden of a traditional sale—with its inspections, repairs, and months of waiting—is too much for your family to handle, selling to a professional buyer can provide the liquidity you need to settle the estate and move forward.
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