Capital Gains Tax on Inherited Property

How the stepped-up basis rule affects capital gains tax on inherited Virginia real estate, what happens with multiple heirs, and when a 1031 exchange applies.

Inheriting real estate in Virginia comes with one of the more favorable rules in the entire tax code: a stepped-up basis to the property's fair market value on the date of the prior owner's death. An heir who receives a Petersburg rental property that the deceased bought decades earlier for $60,000, now worth $310,000, generally starts with a basis of $310,000 rather than the original purchase price, which can eliminate most of the built-in gain that existed while the previous owner held the property.

How the Step-Up Actually Works

The step-up applies to fair market value as of the date of death, established through a formal appraisal or a comparable-sales analysis, not the deceased's original purchase price or any prior tax return. For jointly owned property, the rules differ depending on whether the property was held as community property or with rights of survivorship, and only the deceased owner's share may step up in some ownership structures, which matters for a surviving spouse in a second marriage or a property held with a sibling.

Selling Soon After Inheriting

An heir who sells a Suffolk property within months of inheriting it, at close to the appraised value used for the step-up, often owes little or no capital gains tax, since the basis and the sale price are close together. Any gain that does exist between the date-of-death value and the eventual sale price is automatically treated as long-term, regardless of how briefly the heir actually held the property, which removes the usual one-year holding requirement for long-term rates.

Multiple Heirs and a Shared Property

When several siblings inherit one Virginia property, disagreement over whether to sell, rent, or have one heir buy out the others is common, and the tax treatment follows whatever each heir ultimately does with their share. An heir who sells their fractional interest owes tax on their portion of any gain above the stepped-up basis, while an heir who buys out siblings and keeps the property retains that same stepped-up basis going forward on the whole property.

When an Exchange Makes Sense for Inherited Property

An heir who inherits a Virginia rental or commercial property and wants to stay invested in real estate rather than cash out can use a 1031 exchange on the inherited property just as an original owner could, since the stepped-up basis simply becomes the new starting basis for exchange purposes. This is most useful for an heir who inherits a property in a location or asset type they do not want to manage directly, such as an out-of-state rental, and would rather exchange into something closer to home or into a more passive DST structure.

Coordinating an Exchange Across Multiple Heirs

When siblings jointly inherit a Virginia property and each wants a different outcome, one to sell outright and one to exchange, the estate or trust generally needs to distribute the property into separate ownership interests, often as tenants in common, before each heir can pursue their own tax treatment independently. A Chesterfield family working through this split needs the distribution finalized and title divided well before a sale closes, since attempting to apply exchange treatment to only one heir's share after a joint sale has already closed is far harder to structure than planning the division in advance with an estate attorney and a qualified intermediary involved early.

Frequently Asked Questions

Do you owe capital gains tax immediately when you inherit a Virginia property?

No. Inheritance itself is not a taxable event. Capital gains tax only becomes relevant if and when the heir sells the property, and even then it is calculated against the stepped-up basis rather than the original owner's purchase price.

Does Virginia have an inheritance tax on real estate?

No. Virginia does not impose a state inheritance or estate tax, so the primary tax consideration for inherited Virginia real estate is federal capital gains tax on any appreciation that occurs after the date of death, not a tax on the inheritance itself.

What if the inherited Virginia property was never appraised at the date of death?

A retroactive appraisal or a comparable-sales analysis can typically establish the date-of-death value after the fact, though doing this closer to the actual date of death produces a more defensible number than reconstructing value years later.

Can you do a 1031 exchange on an inherited property you only owned for a few weeks?

The short holding period itself is generally not disqualifying, since inherited property automatically receives long-term treatment, but the property still needs to have been held for investment or business use, not primarily as a personal residence, to qualify for exchange treatment.

How is basis divided when multiple heirs inherit one Virginia property together?

Each heir generally receives a proportional share of the stepped-up basis matching their ownership interest, so a property split evenly among three siblings typically means each heir carries one-third of the total stepped-up value as their individual basis.