Selling Gifted Property vs. Selling Inherited Property

Whether you’re selling inherited property or selling a gifted property, it’s important to understand the tax implications of the sale. While taxation works differently from one scenario to another, both can incur significant taxes. As a result, it’s best to do some research before making any formal commitments.

This is especially true for expats, who often have tax obligations in another country. They may also have different tax breaks available to them and be subject to different reporting obligations than Americans living stateside. 

Below, we’ll walk 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, how to 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 less than its fair market value (FMV): the price it would go for if sold on the open market.

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.

Now, let’s jump right into the tax implications of selling a gifted property vs. selling an inherited property as an expat. Keep in mind that the information below applies to both US-based and foreign real estate.

Federal 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 the house, you will not pay taxes on it. Only when you sell the gifted property is it subject to taxation. The taxes you pay will depend on whether you decide to sell the house you were gifted at its FMV or higher.

Selling the gifted property 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.

B!T note: Gifts between spouses are not subject to taxes as long as the recipient is a US citizen.

Calculation of gift tax for properties 

So, what are the tax implications of gifting a property? Fortunately, those gifting property generally don’t need to worry about taxes unless the value exceeds the annual gift exclusion limit: $18,000 for tax year 2024, or $19,000 in 2025¹. But even then, gift taxes don’t kick in right away. 

However, gifters must:

• File Form 709 to disclose the gift, and
• Subtract anything above the annual gift exclusion from their lifetime gift exemption

For tax year 2024, the lifetime gift exemption is $13.61 million per person, or $27.22 million for married couples. In 2025, that limit increases to $13.99 million ($27.98 million for married couples). Only when an individual makes gifts that exceed that lifetime value must they pay gift taxes at a rate of 18% to 40%, depending on the gift’s value.

Gifted property tax example 

Let’s say that Subash, a US citizen, received a property worth $400,000 as a gift from his aunt in 2025. He decides to give it to his son, Arun, and his new wife, Sarah, as a wedding gift. 

After applying the annual exclusions ($19,000×2) for both Arun and Sarah, the taxable gift amount would be $400,000 minus $38,000, or $362,000. Because $362,000 exceeds the annual limit, he must file Form 709.

Subash must then subtract that $362,000 from his lifetime gift exemption of $13.99 million. His remaining lifetime exemption, therefore, is $13.628 million. This limit serves as both his remaining lifetime gift tax exemption and his estate tax exemption. Further gifting will reduce the amount his estate can exclude from taxation upon his death.

Selling at or above fair market value

Selling a gifted property at or above its FMV, meanwhile, may trigger the 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 the capital gains tax?

The 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.

How to calculate 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%, 15%, or 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: 

• Your overall taxable income
• Your filing status (e.g. single, married filing jointly)
• 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 jointly	Married filing separately	Head of household
0%	$0 – $47,025	$0 – $94,050	$0 – $47,025	$0 – $63,000
15%	$47,026 – $518,900	$94,051 – $583,750	$47,026 – $291,850	$63,001 – $551,350
20%	$518,901+	$583,751+	$291,851+	$551,351+

Long-term capital gains tax rates in 2025

Tax bracket	Single	Married filing jointly	Married filing separately	Head of household
0%	$0 – $48,350	$0 – $96,700	$0 – $48,350	$0 – $64,750
15%	$48,351 – $533,400	$96,701 – $600,050	$48,350 – $300,000	$64,751 – $566,700
20%	$533,401+	$600,051+	$300,001+	$566,701+

^{Source: Nerdwallet}

Capital gains tax example for a gifted property

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 as well as 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 Robert’s filing status and his overall taxable income, he falls into the 15% bracket. Therefore, he must pay $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 the 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) of 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

Federal expat tax implications of selling inherited property

Now, let’s talk about how taxation works when selling an inherited property. Before we do so, we’ll have to define one critical term: estate 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 owns into account, from homes to investments, cars, jewelry, art, and more.

As of 2025, the government only levies estate taxes on estates with a value of $13.99 million or higher.

B!T note: The Tax Cuts and Jobs Act of 2017 established the current estate tax threshold. Unless Congress renews it, the threshold will drop to about $7 million in 2026².

How to calculate estate tax for an inherited property 

For estates whose value exceeds $13.99 million, estate tax rates range from 18% to 40% — just like the gift tax — depending on the estate’s gross value, minus certain debts and expenses. 

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 an inherited house

So, how is inherited property taxed when sold? 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 tax basis: the house’s fair market value at the time the decedent passed.

How to calculate capital gains taxes for an inherited property

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 imagine Robert inherited the property from his father rather than receiving it as a gift while he was alive.

• 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 his overall taxable income, 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.

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:

• Using the home as your primary residence for at least 2 of the last 5 years before the sale
• Owning the property for at least 2 of the last 5 years
• Not having claimed a previous home sale exclusion in the last 2 years

Key takeaways: Federal 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 exemption of $13.99 million (as of 2025)	No
Estate taxes?	No	18-40% tax on estate only if its value exceeds $13.99 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, you will likely 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. If you wait more than a year before selling it, however, you will be subject to the more favorable long-term capital gains tax rates.

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.

State tax implications of selling gifted or inherited property

Beyond federal taxes, you may also face state taxes when selling a gifted or inherited property. Whether or not you are subject to state taxes depends on your state tax residency status, the location of the property, and the specific tax rules in each state.

Who may be subject to state taxes on sales of gifted or inherited property?

Each state has a different definition of tax residence. In most states, expats do not count as state tax residents after moving abroad, provided that they don’t maintain significant ties there (e.g. a home, a business, a spouse and/or children). 

Other states make it more difficult to sever your state tax obligations. These so-called “sticky states” include California, New Mexico, New York, South Carolina, and Virginia. In these states, you may need to actively change your state tax residence to be free of your state tax obligations.

Even if you’re not a state tax resident, though, receiving or inheriting a property located in a given state may subject you to that state’s income taxes. Of course, that all depends on the tax laws of the state in question. 

Tax rules on the sale of gifted/inherited property by state

Here are a few state tax laws worth keeping in mind:

State gift taxes

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 $13.99 million — the same as the federal lifetime gift and estate tax exemption — are subject to a flat 12% tax³.

State inheritance taxes

Six US states place inheritance taxes on assets passed down to heirs⁴:

• Iowa: 0% to 2% on inheritances exceeding $25,000
  • Note: This tax has been repealed from 2025 onwards
• Kentucky: 0% to 16% on inheritances exceeding $500 or $1,000, depending on relation to the deceased
• Maryland: 0% to 10%, depending on relation to the deceased
• Nebraska: 0% to 15%, depending on relation to the deceased and value of the estate
• New Jersey: 0% to 16%, depending on relation to the deceased and value of the estate
• Pennsylvania: 0% to 15%, depending on relation to the deceased
  • Note: Taxes paid within three months of the decedent’s death are reduced by 5%

State estate taxes

Furthermore, 12 states (plus the District of Columbia) levy estate taxes at the following rates:

• Connecticut: 12% on estates exceeding $13.99 million
• District of Columbia: 11.2% to 16% on estates exceeding $4,715,600
• Hawaii: 10% to 20% on estates exceeding $5.49 million
• Illinois: .8% to 16% on estates exceeding $4 million
• Maine: 8% to 12% on estates exceeding $6.8 million
• Maryland: .9% to 16% on estate taxes exceeding $5 million
• Massachusetts: .8% to 16% on estates exceeding $2 million
• Minnesota: 13% to 16% on estates exceeding $3 million
• New York: 3.06% to 16% on estates exceeding $6.94 million
• Oregon: 10% to 16% on estates exceeding $1 million
• Rhode Island: .8% to 16% on estates exceeding $1.77 million
• Vermont: 16% on estates exceeding $5 million
• Washington: 10% to 20% on estates exceeding $2.193 million

Note that Maryland is the only state that imposes both an inheritance tax and an estate tax.

State capital gains taxes

Most states tax capital gains the same as they tax ordinary income. A handful have distinct rules, however. The following states tax long-term capital gains at more favorable rates than ordinary income⁵:

• Arizona: Up to 1.875%
• Arkansas: Up to 2.2%
• Hawaii: Up to 7.25%
• Montana: Up to 4.1%
• New Mexico: Up to 3.54%
• North Dakota: Up to 1.5%
• South Carolina: Up to 3.92%
• Wisconsin: Up to 5.355%

Two states, however, tax capital gains at higher rates than ordinary income:

• Minnesota: 10.85%
• Washington: 7%

States that don’t tax capital gains at all include⁶:

• Alaska
• Florida
• Nevada
• New Hampshire
• South Dakota
• Tennessee
• Texas
• Wyoming

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 permanent residents (even those living abroad) are subject to US taxes. They may also be subject to taxes in their country of residence and/or the country where the property is located. 

Impact of international tax treaties on gifted/inherited property

The US has international tax treaties with dozens of countries, including Canada, Mexico, the UK, and most of the EU. These tax treaties contain benefits that reduce or eliminate the risk of double taxation in theory — however, in practice, Americans abroad can rarely benefit from them. 

That’s because these treaties contain a “savings clause” that allows the US to tax Americans as if the treaty didn’t exist. That said, certain individuals — particularly students, researchers, teachers, trainees, and diplomats — tend to claim benefits more easily than others. Furthermore, each tax treaty contains exceptions to the savings clause which preserve certain benefits.

If your country of residence — and/or the country where the property is located — has a tax treaty with the US, it’s worth consulting US expat tax professionals to see if you’re eligible for any of the benefits included therein. If you are, you must file Form 8833 to claim them.

The Foreign Tax Credit (FTC)

Fortunately, international tax treaties aren’t the only way expats can reduce their tax liability on the sale of gifted or inherited property. The Foreign Tax Credit (FTC) gives Americans dollar-for-dollar US tax credits on any foreign income taxes they’ve paid, provided that they’re legal and charged in their name. 

If you live in a country with higher taxes than the US, this often not only eliminates your US tax liability, but also gives you carryforward credits to apply to future tax bills. To claim the FTC, you must file Form 1116.

B!T note: Another powerful expat tax break is the Foreign Earned Income Exclusion (FEIE). While the FEIE can’t reduce the tax liability associated with the sale of gifted or inherited property, it does allow you to exclude up to $126,500 of your earned foreign income in 2024 or $130,000 in 2025.

Reporting obligations

American expats often face different or additional reporting obligations than their stateside counterparts. 

For example, anyone whose foreign financial accounts total over $10,000 at any given point in the year must file a Foreign Bank Account Report (FBAR). So if you transfer the proceeds of a property sale exceeding $10,000 to a foreign financial account, you would need to file an FBAR. 

Similarly, Americans with certain assets worth over $200,000 on the last day of the tax year — or over $300,000 at any time during the tax year — must file Form 8938. While you don’t necessarily have to report foreign real estate exceeding the aforementioned thresholds on Form 8938, you will if you hold it through a foreign company. 

What’s more, transferring the proceeds of a sale exceeding the thresholds to a foreign financial account will also trigger Form 8938 reporting.

Simplify & optimize your US taxes with Bright!Tax

As US expat tax specialists, we know how complicated taxes can get for Americans abroad — especially when factoring in things like property sales. After helping thousands of clients in hundreds of countries around the world, we have the knowledge and experience needed to file and minimize your US taxes.

Reach out today to schedule a free 20-minute consultation!

Resources:

1. What Is the Lifetime Gift Tax Exemption?
2. Understanding the 2026 Changes to the Estate, Gift, and Generation-Skipping Tax Exemptions
3. Guide to the Connecticut Gift Tax for 2025
4. 18 States With Scary Estate and Inheritance Taxes
5. State Tax Rates on Long-Term Capital Gains, 2024
6. 9 States With No Income Tax