INHERITED PROPERTY CAPITAL GAINS

Inherited real estate is subject to a fundamentally different basis rule than property acquired by purchase. Under Section 1014 of the Internal Revenue Code, an heir generally receives a basis in inherited property equal to its fair market value on the date of the original owner's death, or on the alternate valuation date if the estate elects that option, rather than carrying over the decedent's original purchase price and accumulated depreciation. This adjustment is commonly called a stepped-up basis, and it means that appreciation which occurred during the decedent's lifetime, along with any depreciation the decedent had previously claimed, is generally erased for the heir's tax purposes rather than carried forward.

The practical effect for a Boston, MA heir who inherits a property and sells it relatively soon after receiving it is that little or no capital gain, and little or no depreciation recapture, is typically triggered, since the sale price is often close to the stepped-up basis established at the date of death. This is a meaningfully different outcome than what the original owner would have faced selling the same property, since the original owner's basis would reflect decades of depreciation deductions and none of the value appreciation gets a reset.

Holding period after inheritance

Property acquired through inheritance is automatically treated as held long-term for capital gains purposes, regardless of how long the heir actually holds it before selling, which is a specific exception to the general one-year holding period rule that applies to purchased property. This means an heir who inherits a Boston, MA property and sells it within days can still qualify for long-term capital gains rates on any gain above the stepped-up basis, rather than being taxed at higher short-term rates.

When 1031 exchanges become relevant to heirs

An heir who decides to hold the inherited property rather than sell it, renting it out or otherwise using it for investment purposes, steps into the same 1031 exchange eligibility as any other investment property owner going forward. Because the heir's basis has already been reset to fair market value at death, an exchange completed by the heir defers gain only on appreciation that occurs after inheritance, not on any appreciation during the decedent's lifetime, which has already been permanently excluded from taxation through the basis step-up rather than merely deferred.

This distinction matters for how a Boston, MA heir should think about timing. If the goal is simply to convert an inherited property into cash with minimal tax exposure, selling relatively promptly after the date of death, while the stepped-up basis closely tracks the sale price, often achieves that with little need for a 1031 exchange at all. If instead the heir wants to continue holding real estate as an investment, perhaps consolidating an inherited property into a more actively managed asset class, an exchange lets the heir redeploy the full stepped-up value into a new property without triggering tax on the built-in gain since death, which becomes more relevant the longer the property is held and the more it appreciates after inheritance.

Multiple heirs inheriting a single property together introduce additional complexity, since each heir generally needs to hold their fractional interest for investment purposes, not personal use, for that interest to qualify for a subsequent 1031 exchange, and heirs who want to go separate directions, some wanting to sell and others wanting to exchange, may need to explore a tenancy-in-common structure or a formal partition before individual exchange plans can proceed. Massachusetts also imposes its own estate tax on estates above a state-specific threshold, which is a separate consideration from the capital gains basis step-up and should be evaluated by the estate's own tax counsel as part of estate settlement, generally before the property is retitled to individual heirs.

Heirs who have determined they want to hold and exchange rather than sell an inherited Boston, MA property can review the site's The 45-Day Identification Period and The 180-Day Exchange Deadline explainers to understand the same statutory clocks that will apply once the property is formally held for investment and an exchange is underway.