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Selling inherited property or selling a gifted property? Both have significant tax implications, making it important to gather information before you make any formal commitments.
The exact way the federal government taxes property sales depends on individual circumstances. Factors like your country of residence, how you came to own the property, and how long you’ve held it all make a difference.
Below, we’ll guide you through the process of selling an inherited property vs. a gifted property from a tax perspective. You’ll learn how the government taxes these property sales, how to calculate taxes, minimize your tax liability, and more.
What is a gifted house for tax purposes?
Before you understand the tax implications of selling a gifted vs. inherited property, it’s important to understand the definitions of each.
A gifted house is a house transferred to you for nothing of financial value in return or for consideration valued at less than its fair market value (FMV).
What is an inherited house for tax purposes?
An inherited property, on the other hand, is a property that you receive as a designated heir, inheritor, or successor after the owner has passed away.
Reminder:
While inheritors often include family members of the deceased, they aren’t always related.
Now, let’s jump right into the tax implications of selling a gifted property vs. selling an inherited property as an expat. The information below applies whether you’re dealing with both US-based or foreign real estate.
Expat tax implications of selling a gifted house
Expat tax implications of selling a gifted house
The Internal Revenue Service (IRS) does not classify a gift received as income, so when you receive it, you will not pay taxes on it. Only when you sell it, is it subject to taxation. The taxes you pay will depend on whether you decide to sell it at its FMV or higher.
Selling below fair market value
The US government considers the sale of a gifted property below its FMV to be a gift rather than a sale and may tax it as such.
Gift tax
The IRS defines the gift tax as “a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return.” Fortunately, gift taxes rarely apply, thanks to the IRS’ generous gift tax thresholds. When they do, the one who pays them is the gift giver — not the recipient.
Reminder:
Gifts between spouses are not subject to taxes as long as the recipient is a US citizen.
Calculation of gift tax
You generally don’t need to worry about gift taxes unless the value of your gift exceeds the annual gift exclusion limit ($18,000 for tax year 2024). Even then, gift taxes don’t kick in right away.
Instead, you will simply:
- file Form 709 to disclose the gift and
- subtract anything above the annual gift exclusion from your lifetime gift exclusion
Pro tip:
As of 2024, this limit is $13.61 million per person or $27.22 million for married couples. Exceeding this figure during your lifetime will require you, as the gifter, to pay taxes at a rate of 18% to 40%, depending on the gift’s value.
Example:
Subash, a US citizen, receives a property worth $400,000 as a gift from his aunt in 2024. He decides to give it to his son, Arun, and his new wife, Sarah, as a wedding gift.
After applying the annual exclusions (18,000×2) for both Arun and Sarah, the taxable gift amount would be $400,000 – $36,000 = $364,000.
Therefore, Subash’s remaining lifetime exemption would be $13.61 million – $364,000 = $13.246 million.
Pro tip:
Connecticut is the only state to levy a gift tax on top of the federal gift tax. Gifts that exceed the state’s gift exclusion limit of $13.61 million—the same as the federal gift exclusion limit—are subject to a flat 12% tax.
The $13.61 million figure also serves as the federal estate tax exemption. Strategically gifting property is a common tactic in estate planning. It can be a particularly interesting course of action when the recipient of the gifted property is a foreign spouse or non-resident alien.
It’s important to remember this: In the example above, Subash must file a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, for the year he makes the gift since the total value given to each recipient exceeds the annual exclusion.
The lifetime gift tax exemption is unified with the estate tax exemption, meaning the amount Subash uses for gifts will reduce the amount available for his estate to use against the estate tax upon his death.
Selling at or above fair market value
Selling a gifted property at or above its FMV, meanwhile, may trigger capital gains tax.
It may also require you to complete Form 8949, Sales and Other Dispositions of Capital Assets, depending on whether or not the home was previously a personal residence. With this form, you’ll share the transaction details with the IRS and calculate capital gains taxes on the sale.
What is capital gains tax?
Capital gains tax is a tax on the profit you receive when you sell an asset for more than its adjusted cost basis. Adjusted cost basis can vary depending on how you acquired the property (for example, by purchase, gift, or inheritance) and whether you’ve made any improvements to it.
Calculating capital gains tax on gifted property
The exact tax rate you pay on capital gains depends on how long you held the property before selling it:
| Short-term | Long-term | |
| How long did you own the asset? | 1 year or less | Greater than 1 year |
| Tax rates | 10% – 37% | 0% – 20% |
Short-term capital gains tax rates are the same as those for ordinary federal income taxes: 10% to 37%. The exact rate you will pay depends on your tax bracket.
Long-term capital gains tax rates, on the other hand, are more favorable. You will pay at a rate of either 0%, 15%, or 20% on long-term capital gains, depending on:
- The total amount of income you’ve earned
- Your filing status
- The year of sale (the IRS adjusts capital gains tax brackets for inflation annually)
Long-term capital gains tax rates in 2024
| Tax bracket | Single/married filing separately | Married filing jointly | Head of household |
| 0% | $0 – $47,025 | $0 – $94,050 | $0 – $63,000 |
| 15% | $47,026 – $518,900 | $94,051 – $583,750 | $63,001 – $551,350 |
| 20% | $518,901+ | $583,751+ | $551,351+ |
Example:
Let’s say that Robert’s father, a US citizen:
- Bought a seaside home in Cornwall, England for $500,000 in 2018
- Installed a new heating & cooling system for $50,000 in 2019
- Gave Robert (also a US citizen) the house as a gift in 2020
Robert then sold the house in 2024 for $750,000.
The house’s adjusted cost basis — aka the value of the house when Robert acquired it plus improvements — is $550,000. This takes into account the $500,000 purchase price + the $50,000 heating & cooling system.
To calculate Robert’s capital gain, we’ll subtract the adjusted cost basis ($550,000) from the sale price ($750,000) to get $200,000.
Since Robert held the house for four years before selling it, the more favorable long-term capital gains rate applies. Given that Robert is a single filer and his $200,000 in capital gains falls between the $47,026 – $518,900 band, he will pay 15% in capital gains taxes. Therefore, he pays $30,000 (15% of $200,000) in total capital gains.
However, he may be able to avoid the capital gains tax entirely — we’ll explain how below.
Exclusions from capital gains tax
If the house you are selling meets certain requirements, you can exclude up to $250,000 ($500,000 for those married filing jointly) from your capital gains from taxation.
To qualify for the home sale exclusion, you must meet all of the following criteria:
- You used the home as your primary residence for at least 2 of the last 5 years immediately preceding the sale
- You were the owner of the property for at least 2 of the last 5 years
- You did not claim a previous home sale exclusion within the last 2 years
Tax implications of selling inherited property
If you want to sell an inherited house, you should familiarize yourself with the estate tax and then consider the capital gains tax.
What is the estate tax?
An estate tax is a tax the government levies on estates exceeding a certain value. When calculating the value of an estate, the government takes everything the decedent owned into account: homes, cars, jewelry, art, investments, etc.
As of 2024, the government only places estate taxes on estates with a value of $13.61 million or higher. The Tax Cuts and Jobs Act of 2017 established this threshold. Note that unless Congress renews it, the threshold will drop to $6 million in 2026.
Calculation of estate tax
For estates whose value exceeds $13.61 million, estate tax rates range from 18% to 40% depending on the estate’s gross value, minus certain debts and expenses.
Note:
12 states (plus the District of Columbia) levy estate taxes, with limits ranging from $1 million to $13.61 million.
Just as with a gifted house, sales of an inherited house may result in capital gains taxes, but there is one key benefit to selling an inherited house to keep in mind.
Capital gains tax on inherited house
Calculation of capital gains tax
Selling a home you’ve inherited can result in significantly less capital gains taxes than selling a gifted home. That’s because the adjusted cost basis used to calculate your capital gains is not the price at which the decedent acquired it. Instead, it’s a stepped-up basis: the house’s fair market value at the time the decedent passed.
Let’s revisit our earlier example with Robert and his seaside home in Cornwall.
As a reminder, Robert’s father:
- Bought a seaside home in Cornwall, England for $500,000 in 2018
- Installed a new heating and cooling system for $50,000 in 2019
In this case, though, let’s say that Robert inherited the property from his father.
- Robert inherited the house when his father passed away in 2020 when its FMV was $700,000
- Robert sold the house in 2024 for $750,000
With an inheritance, the adjusted cost basis is the same as the FMV on the date the decedent passed. In the case of Robert’s father’s passing, the basis is stepped up to $700,000.
To calculate Robert’s capital gain we’ll subtract the adjusted cost basis ($700,000) from the sale price ($750,000) to get $50,000. Since he held the house for four years before selling, Robert qualifies for the long-term capital gains tax. Given his status as a single filer and the amount of gains realized, he falls into the 15% capital gains tax bracket.
Overall, he will pay a capital gains tax of $7,500 (15% of $50,000). This is four times less than what he would have paid in capital gains taxes if he had received the house as a gift rather than through inheritance.
Note:
Six US states place inheritance taxes on assets passed down to heirs: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
Exclusions from capital gains tax
Again, as a single filer you may be able to exclude up to $250,000 in capital gains after selling an inherited house if you meet the criteria mentioned earlier.
Key takeaways: Tax implications of selling gifted property vs. selling inherited property
| Selling gifted property | Selling inherited property | |
| Gift taxes? | Taxes of 18-40% paid by gift giver, only if they have exceeded lifetime gift exclusion of $13.61 million | No |
| Estate taxes? | No | 18-40% tax on estate only if its value exceeds $13.61 million |
| Short-term capital gains taxes? | Taxes of 10%-37% on sale price minus adjusted cost basis (price of acquisition + improvements), only if sold within a year or less of acquisition | Taxes of 10%-37% on sale price minus adjusted cost basis (FMV upon date of decedent’s death), only if sold within a year or less of acquisition |
| Long-term capital gains taxes? | Taxes of 0%-20% on sale price minus adjusted cost basis (price of acquisition + improvements), only if sold more than a year after acquisition | Taxes of 0%-20% on sale price minus adjusted cost basis (FMV upon date of decedent’s death), only if sold within a year or less of acquisition |
| Eligible for home sale exclusion? | Yes, if you meet all requirements | Yes, if you meet all requirements |
Similarities of selling gifted property vs, selling inherited property
Whether you’re selling a gifted house or an inherited house, high gift tax and estate tax exclusion limits make it likely you will only pay the capital gains tax. If you sell the property within a year or less of acquiring it, you will pay short-term capital gains taxes. In case you wait more than a year before selling it, you will pay long-term capital gains taxes.
When the requirements are satisfied, both sales can qualify for the $250,000 home sale exclusion.
Lastly, in both cases, you should capture the sale by filing IRS Form 8949.
Differences between “selling a property that was gifted to me” and selling inherited foreign property
Capital gains taxes on the sale of an inherited house are often lower than they are for a gifted house. This is due to the way you calculate the adjusted cost basis for each.
Gifted houses’ adjusted cost basis equals the price the gifter paid for the house plus the value of any improvements made to it.
Inherited houses’ adjusted cost basis equals the FMV on the day of the donor’s death.
The higher your adjusted cost basis, the lower your capital gains; and the lower your capital gains, the less you pay in capital gains taxes.
Factors to consider
The Tax Cuts and Jobs Act of 2017 significantly expanded the estate tax exclusion thresholds, but unless Congress takes further action, they will expire after 2025.
After that, the exclusion limits may fall by as much as half. As a result, now could be the best time to make high-value gifts and take advantage of the expanded thresholds before they expire.
Special considerations for expats
The tax implications of selling a house are complicated enough, but it can get even trickier for US expats. That’s because all US citizens and Green Card holders (even those living abroad) are subject to US taxes, and they may be subject to taxes in their country of residence as well.
With that in mind, it’s worth making a couple of callouts in particular:
- If you have to pay foreign capital gains taxes on the sale of a gifted or inherited home, you may be able to use the Foreign Tax Credit to avoid double taxation by the US government
- If you transfer the proceeds of a property sale exceeding $10,000 to a foreign financial account, you must file a Foreign Bank Account Report (FBAR)
- If you hold foreign property (or any other type of foreign assets) worth over $200,000 on the last day of the tax year — or over $300,000 at any time during the tax year — you must file Form 8938
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