Capital Gains on Inherited Property in Virginia: How the Stepped-Up Basis Saves You Money in 2026

Updated April 28, 2026 by David Mount, REALTOR® & COO, The Redux Group of eXp Realty | Northern Virginia

This guide is general educational content, not tax advice. Tax law changes and individual situations vary. Consult a qualified CPA before relying on any tax position.

One of the most common questions David Mount hears from Northern Virginia families dealing with an inherited home is: “How much tax am I going to owe when I sell?” The answer is usually a pleasant surprise. Federal tax law gives heirs a powerful break called the stepped-up basis, and Virginia adds nothing on top of it. For most NoVA families selling an inherited home within a year or two of the death, the federal capital gains tax is small or zero, and Virginia state tax is likewise minimal.

This guide explains exactly how the stepped-up basis works, walks through a real Northern Virginia example, and flags the common mistakes that can erode this benefit.

What the Stepped-Up Basis Actually Is

For federal capital-gains purposes, your “basis” in a piece of property is generally what you paid for it, plus the cost of major improvements. When you sell, your taxable capital gain is the sale price minus your basis. The higher your basis, the lower your taxable gain.

For inherited property, the IRS doesn’t make heirs use the deceased’s original purchase price as the basis. Instead, under Internal Revenue Code §1014, the basis “steps up” to the property’s fair market value on the date of the decedent’s death. All appreciation that occurred during the deceased’s lifetime is effectively erased for tax purposes.

This is one of the most generous provisions in U.S. tax law. It means decades of appreciation on the family home, the vacation house, the rental property, or the investment portfolio are wiped clean for the next generation’s tax purposes. The rule applies whether the property goes through probate, passes through a revocable living trust, or transfers via a transfer-on-death (TOD) deed.

A Worked Northern Virginia Example

Imagine your parent bought a home in McLean for $250,000 in 1995. They lived in it for 31 years, made some improvements, and passed away in March 2026. The fair market value of the home on the date of death (per a comparative market analysis or appraisal) is $1,400,000.

Without the step-up (if they had sold during life), they would have owed federal capital gains tax on $1,150,000 of appreciation ($1.4M sale price minus $250K basis), minus the $250,000/$500,000 primary-residence exclusion under IRC §121. Even with that exclusion, they’d potentially owe long-term capital gains on something like $900,000 of gain — a federal tax bill in the neighborhood of $135,000 or more.

With the step-up (because you inherited it), your basis is $1,400,000. Your scenarios:

• You sell within 3 months for $1,400,000 (the date-of-death value). Your gain is $0. Federal capital gains tax: $0. Virginia capital gains tax: $0. Total federal + state tax on the sale: $0.
• You sell 9 months later for $1,450,000. The home appreciated $50,000 between death and sale. Your taxable gain is $50,000 (long-term, because inherited property always gets long-term treatment regardless of how long you held it). Federal long-term capital gains tax at 15%: $7,500. Virginia tax on the same $50,000 at 5.75%: $2,875. Total: about $10,375.
• You sell 5 years later for $1,800,000. The home appreciated $400,000 since death. Federal tax at 15% (or 20% if you’re in the highest bracket): $60,000–$80,000. Virginia tax at 5.75%: $23,000. Total: $83,000–$103,000.

The pattern is obvious: the longer you hold post-death, the more taxable post-death appreciation accumulates. For most heirs in a normal-appreciation environment, selling within 12 months of the date of death is the most tax-efficient choice.

Joint Owners vs Single Owners (Important Difference)

Step-up rules differ depending on how the home was titled at the time of death.

Single owner (most inherited homes). The full home gets a 100% step-up to date-of-death value. Simple.

Married couple, joint with right of survivorship or tenants by the entirety. When the first spouse dies, only that spouse’s half of the home gets stepped up. The surviving spouse’s half retains the original basis. When the second spouse later dies, the survivor’s half then gets stepped up. This is sometimes called a “half-step-up” and can leave significant taxable gain on the table for the second-spouse-to-die scenario.

Married couple living in a community-property state at the time of acquisition. Virginia is not a community property state, but if the couple lived in California, Texas, Arizona, or another community-property state when they bought the home, the IRS may allow a full step-up on the entire home at the first death even though they later moved to Virginia. This is rare but can save serious money. Talk to a CPA if it applies.

Trust ownership. A revocable living trust gets the same stepped-up basis as direct individual ownership. An irrevocable trust may or may not, depending on the trust structure. If the home was in an irrevocable trust, do not assume the step-up applies — consult a CPA before listing.

Virginia State Tax: None on the Inheritance Itself

Virginia has no state estate tax and no state inheritance tax. The Commonwealth taxes nothing simply because someone died and left property to an heir. (Virginia’s estate tax was effectively repealed in 2007.)

What Virginia does tax is capital gains as ordinary income, at the standard Virginia income tax rate of up to 5.75%. But the Virginia gain calculation uses the same stepped-up basis as federal: if your gain is $0 federally, it’s $0 in Virginia. If you have a small post-death gain, you owe a small Virginia tax on it.

The only Virginia estate-related charge most families encounter is a small probate tax of $0.10 per $100 of estate value (Va. Code §58.1-1712), and only if the estate exceeds $15,000. On a $1.4M estate, the probate tax is $1,400 — a one-time court fee, not a death tax. See our full Virginia inheritance tax guide for the complete breakdown.

Federal Estate Tax Thresholds in 2026

Federal estate tax (which is different from capital gains tax) only applies to very large estates. Beginning January 1, 2026, the federal estate and gift tax exemption is $15 million per individual ($30 million per married couple), and it’s now permanent with annual inflation adjustments.

For the vast majority of Northern Virginia estates, federal estate tax is irrelevant. A typical Fairfax estate of $1M to $5M owes zero federal estate tax. Even an unusually large NoVA estate of $10M owes nothing. Only estates over $15M (or $30M for couples) pay federal estate tax.

Capital gains tax (the focus of this article) is separate and applies to the seller of the property after death. It’s the relevant tax for almost every Virginia heir.

The 1099-S You’ll Get at Closing

When the inherited home sells, the title company issues IRS Form 1099-S reporting the gross sale price. The 1099-S goes to the IRS in the name of the seller of record — which depends on how the deed was titled at closing.

• If the home is sold by the estate (probate path), the 1099-S goes to the estate using its EIN.
• If the home is sold by a trust, it goes to the trust using the trust’s EIN.
• If the home was distributed to heirs first and they sell as individuals, it goes to each heir using their Social Security number.

You and your CPA use the stepped-up basis to compute the actual taxable gain. The 1099-S only reports gross proceeds, not gain — the IRS expects you to do the basis calculation on your tax return.

What to Tell Your CPA

When you talk to your CPA about the inherited home sale, bring three things:

1. The date of the deceased’s death. This is your basis date.
2. Documentation of the date-of-death fair market value. Ideally a written comparative market analysis (CMA) from a local agent dated as of the date of death, or a formal appraisal. David provides date-of-death CMAs at no cost as part of his engagement with estate clients. The CMA also serves as supporting documentation for the inventory you file with the Commissioner of Accounts in probate.
3. The closing settlement statement. This shows the gross sale price (which matches the 1099-S) and the closing costs you paid, which adjust your effective gain.

With those three items, your CPA can compute the post-death appreciation and any resulting tax. For most NoVA families selling within a year of death, the conversation ends with “you owe nothing.”

Common Mistakes That Lose the Step-Up

Mistake 1: Holding too long. Every year you hold post-death, post-death appreciation accumulates and becomes taxable. Selling within 12 months of the date of death is usually the most tax-efficient path.

Mistake 2: Not documenting the date-of-death value. If the IRS audits and you can’t prove what the home was worth on the date of death, they may use a lower basis, which increases your taxable gain. Always get a written CMA or appraisal contemporaneous with the death.

Mistake 3: Assuming Virginia taxes the inheritance. It doesn’t. Some heirs over-withhold on Virginia taxes thinking they owe the Commonwealth on the inheritance itself. They don’t.

Mistake 4: Confusing capital gains with estate tax. These are completely different. Capital gains tax is owed by the seller after a sale. Estate tax (federal only, over $15M) is owed by the estate before distribution. Most heirs only need to think about capital gains.

Mistake 5: Letting an irrevocable-trust home pass without checking the basis rules. Irrevocable trusts can have very different basis rules than revocable trusts. Talk to a CPA before listing if the home is in an irrevocable trust.

Frequently Asked Questions

Will I owe capital gains tax on an inherited home in Virginia?

Federally, only on appreciation that occurs after the date of death. If you sell relatively soon after inheriting, your taxable gain is usually small or zero. Virginia adds its standard income tax rate (up to 5.75%) only to the same federal taxable gain — so if federal tax is zero, Virginia is also zero.

Does the stepped-up basis apply if the home was in a trust?

Yes for a revocable living trust — same as direct individual ownership. Maybe for an irrevocable trust, depending on how it was structured. Talk to a CPA before listing if the home was in an irrevocable trust.

Do I have to use the date-of-death value, or can I use an alternate valuation date?

The default is date-of-death value. The IRS allows an “alternate valuation date” (six months after death) only for estates large enough to file Form 706 (federal estate tax return), which is rare. For most heirs, date-of-death value is the only option.

What documents prove the date-of-death value?

A written comparative market analysis from a real estate agent dated as of the date of death, or a formal appraisal. David provides CMAs at no cost as part of his engagement with estate clients. Keep the CMA with your tax records permanently.

What if I make improvements to the home after inheriting it before selling?

Improvements add to your basis. Capital improvements (new roof, kitchen renovation) increase your stepped-up basis dollar-for-dollar. Repairs (painting, landscaping) generally don’t add to basis but may reduce your taxable gain in other ways. Keep receipts.

Can I claim the $250,000 / $500,000 primary residence exclusion on an inherited home?

Only if you live in it as your primary residence for at least 2 of the 5 years before sale. If you inherit a home and immediately sell it, the IRC §121 primary-residence exclusion does not apply — but you don’t need it, because the stepped-up basis usually wipes out any gain anyway.

What if the home actually decreased in value after death?

Then your sale produces a capital loss, which can offset other capital gains and (limitedly) ordinary income. Talk to your CPA about how to claim the loss properly.

Does Virginia honor the federal stepped-up basis?

Yes. Virginia computes capital gains using the same federal basis, so the stepped-up basis flows through to your Virginia return automatically.

Get Help With Your Inherited Home Sale

If you’re a Virginia heir trying to figure out the right time to sell — balancing tax considerations, market timing, and family dynamics — David Mount can help. David provides written comparative market analyses dated as of the date of death (which double as supporting documentation for both the IRS and the Commissioner of Accounts), works with experienced Northern Virginia estate attorneys when legal questions arise, and can walk you through the practical timeline. Call (571) 946-8418 or email david.mount@thereduxgroup.com for a confidential, no-pressure consultation.

Related Resources

• Selling an Inherited Home in Northern Virginia: Estate Sale Guide (2026)
• Does Virginia Have an Inheritance Tax? A 2026 Answer for Heirs
• Trust Sale vs Probate Sale in Virginia: Which Path Is Right for Your Inherited Home?
• Selling a Home Held in a Trust in Virginia: Step-by-Step Guide for Successor Trustees
• How Long Does Probate Take in Fairfax County, VA? (2026 Timeline)