Inheriting a Property in 2025? What Taxes Apply and How to Turn It Into an Opportunity

If you’ve recently inherited a home, you’re probably wondering what happens next, and, more importantly, how taxes might affect your inheritance.

Whether you sell the property, move in, or rent it out, your choice shapes your tax outcome. Below we unpack everything, from federal estate thresholds to state-level inheritance rules, plus the smartest financial paths real homeowners take.

What Taxes Might Apply When You First Inherit a Home?

When a property transfers through an estate, several different taxes could come into play. Knowing which ones matter helps you plan calmly and avoid surprises.

• Federal Estate Tax: This applies to estates valued above $13.99 million per individual in 2025. If your loved one’s total assets exceed that, the estate, not you, may owe tax on the amount above the threshold.

• State Estate Tax: Twelve states plus D.C. have their own estate taxes, often with far lower exemptions than the federal level. States currently taxing estates include Washington, Oregon, Minnesota, Illinois, Maryland, Vermont, Connecticut, New York, Rhode Island, Massachusetts, Maine, and Hawaii.

• State Inheritance Tax: A few states tax the recipient instead of the estate. In 2025, these are Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. (Iowa fully repealed its inheritance tax for deaths after Jan 1 2025).

• Federal Gift Tax: If the property was given to you while the owner was alive, gift-tax rules apply instead. The annual exclusion for 2025 is $19,000 per recipient.
  
  

Tip: Get a professional appraisal dated as of the decedent’s death. That becomes your “stepped-up basis”, protecting you from unnecessary capital-gains tax later.

Example starting point: Let’s say you inherit your aunt’s home in Oregon valued at $600,000 in 2025. Because Oregon has a state estate tax and your aunt’s total estate is $2 million, the estate may owe Oregon estate tax on the amount above the state’s exemption (about $1 million). You, as the heir, don’t pay that directly, but it affects what’s left to distribute. Since the federal exemption is $13.99 million, no federal estate tax applies here. After taxes are settled by the estate, you receive the property tax-free as your inheritance.

If You Sell the Inherited Home, How Does Capital Gains Tax Work?

Selling is common when heirs prefer liquidity over upkeep, but you only owe tax on the gain after inheritance, not the full sale price.

If the home was worth $600,000 when you inherited it and you later sell for $650,000, your taxable gain is $50,000.

Here’s what to keep in mind:

• The step-up in basis resets your cost to the home’s market value at death.

• Hold the home > 1 year to qualify for long-term capital-gains rates. Sell sooner, and short-term rates (often higher) apply.

• Primary-residence exclusion: If you live in it for at least 2 of the last 5 years, you can exclude up to $250k (single) or $500k (married) of gain.

• Sell for less than the basis? You may claim a capital loss.
  
  

Pro move: Document closing costs, repairs, and realtor fees, all can raise your basis and shrink taxable gain.

Continuing our example: If you sell your inherited Oregon home for $650,000, you’d owe capital gains on just the $50,000 gain. Say you spent $10,000 on repairs and $30,000 in realtor fees and closing costs, those can reduce your taxable gain to just $10,000, lowering your tax bill substantially.

Can You Turn an Inherited Property Into a Rental and Build Passive Income?

Yes, and for many owners, it’s the most tax-efficient choice. Turning your inherited home into a rental can create steady income while unlocking major deductions.

You can typically deduct:

• Property taxes and insurance premiums.
  

• Maintenance and repairs.
  

• Professional fees (accounting, management, legal).
  

• Utilities you pay on behalf of tenants.
  

• Depreciation, a non-cash deduction that lowers taxable income each year.
  

If you later sell and buy another investment property, a 1031 exchange lets you defer capital gains tax, keeping more cash in play.

Interesting geographical insights:

• California caps assessed-value growth at around 2 %.
  

• Florida has no state income tax, so rental profits stay yours.
  

• Maryland & Pennsylvania require local rental registrations but still allow federal deductions.
  
  

Example continued: If you rent out your inherited home for $3,000/month, that’s $36,000/year in gross income. After deducting $6,000 in property taxes, $2,000 insurance, $4,000 maintenance, and $15,000 in depreciation, your taxable income might drop to around $9,000, while still pocketing healthy cash flow.

Need a hand? Belong can manage your rental end-to-end: pricing, resident screening, maintenance, clean record-keeping, … You earn passive income without landlord stress and get fast answers to tax questions from our team of experts.

What If You Want to Keep the Home as Your Own Residence?

Choosing to move in can be both sentimental and strategic. Here’s how the tax picture changes:

• You’ll pay annual property taxes (but many states offer homestead exemptions to lower them).
  

• Keep receipts for improvements, they increase your basis and cut future gains.
  

• Live there for 2 of 5 years and you qualify for the same capital-gains exclusion as above.
  

• Some states offer energy or renovation credits for upgrading older homes (Massachusetts, Oregon, Colorado).
  

Example continued: If you move into your inherited Oregon home and later sell it after five years for $700,000, your gain would be $100,000 (from your $600,000 stepped-up basis). But since you’ve lived there for at least two years, that $100,000 gain is fully excluded, no capital gains tax owed.

What Should You Do Right After Inheriting a Property?

Here’s a simple checklist for the first few weeks:

• Order a death-date appraisal to set the fair market value.
  

• Consult an estate attorney to finalize title and probate steps.
  

• Meet with a CPA to confirm which taxes apply (federal vs state).
  

• Decide whether to sell, rent, or move in. Each changes your tax picture.
  

• Keep all receipts for expenses and repairs for deductions later.
  
  
  

How Belong Simplifies Ownership for Inherited Homes

Inheriting a home should be a gift, not a full-time job. That’s why Belong was built to make property ownership simpler, more profitable, and stress-free.

Here’s what sets Belong apart:

• Guaranteed Rent Payments: You get paid on time every month, no matter when tenants pay.
  

• Premium Marketing Services: We professionally photograph, list, and market your property across major rental platforms, ensuring your home gets maximum exposure and attracts high-quality applicants fast.
  

• Resident Screening & Fraud Protection: Every applicant goes through an industry-leading screening process including credit, income, criminal,  background, and identity verification to protect your home from fraud and ensure only trustworthy residents move in.
  

• Full-Service Management: We handle repairs, resident communications, and vendor coordination so your property stays beautiful and compliant.
  

• Transparent Financial Tracking: Every expense and credit is logged for easy tax filing and depreciation records.
  

• Trusted Local Network: Our residents and vendors are carefully vetted to protect your family’s assets.
  

• Strategic Guidance: We’ll help you decide whether to hold, sell, or exchange your property based on your financial goals.
  

With Belong, you don’t just inherit a home, you gain a partner who turns it into a stable, income-producing asset that aligns with your future.

Final Thought: Turning Inheritance Into Opportunity

An inherited home is more than just a piece of real estate, it’s a financial springboard. Understanding how federal and state taxes interact, documenting your basis, and making a plan to sell, rent, or live in the home turns uncertainty into opportunity.

And if you want help managing the property or planning its next chapter, Belong is ready to make ownership feel effortless.