The Tax Consequences When Selling a House Inherited in Massachusetts
The tax consequences when selling a house inherited in Massachusetts can be hard to understand and untangle much of the time.
The relevant laws may seem fairly simple at first glance, but they can get complicated when you factor in all the legal conditions and nuances. The short version is that if you made gains, you’ll owe taxes, and if you had a loss, you may have a tax deduction.
But then it gets complicated because whether you made a profit or had a loss also depends on when the decedent died and the use you made of the house.
If you’re dealing with an inherited home while also handling probate, family decisions, repairs, and legal paperwork, you’re not alone. Many heirs in Massachusetts find themselves overwhelmed by what to do next, and taxes are often one of the biggest concerns.
What Are the Tax Consequences When Selling a House Inherited in Massachusetts?
Capital Gains or Losses Taxes
The tax consequences when selling a house inherited in Massachusetts include being subject to capital gains taxes.
Capital gains or losses are those that stem from the sale of items you use for personal or investment purposes, such as stocks or a house. So for income tax purposes, the sale of an inherited house in Massachusetts is treated as a capital gain or loss.
The catch with selling an inherited house is that a gain or loss is considered a long-term gain or loss.
Further, losses on personal property cannot be claimed as a tax deduction. So if you ever used the inherited house as your personal home, it became personal property, and you can’t deduct a loss if you sell it.
Reporting the Inherited House
In some cases, the executor has to file an estate tax return to report the inherited house. But this is only if the estate exceeds the inflation-adjusted exemption amount.
The determination of the gain or loss on a house sale depends on the “basis” of the house. As the basis goes higher, the taxable gain from a sale decreases.
There are, however, different rules for the sale of an inherited house that allow for a special stepped-up basis.
“Basis” Determination
The basis of the house depends largely on when it was inherited. In general, the basis is the fair market value on the date of the decedent’s death.
What this means is that the capital gains taxes you owe are based on gains above the property value at the time of the decedent’s death, not what the decedent paid for the house.
If you never lived in the house and if it sells for less than what the fair market value was at the time of death, then you have a deductible loss.
Just be aware that only $3,000 of such losses can be deducted each year against your ordinary income. Anything above that $3,000 will have to be carried over as deductions in future years.
Understanding the Stepped-Up Basis Rule
One of the most important tax rules that impacts selling an inherited house in Massachusetts is the stepped-up basis rule.
This rule is a major reason why many heirs pay far less in capital gains tax than they expect. When a homeowner passes away, the IRS typically “resets” the value of the home to its fair market value on the date of death. That new value becomes the property’s updated cost basis.
For example, imagine your parent bought a home decades ago for $150,000. If that home is worth $650,000 at the time of their passing, the stepped-up basis would likely adjust the cost basis to around $650,000 instead of the original purchase price.
So if you later sell the home for $675,000, your taxable gain may only be $25,000, not $525,000. This can make an enormous difference in what you owe.
This is especially relevant in Massachusetts, where property values in many towns have increased significantly over the last 20 to 40 years. Homes in areas like Greater Boston, the North Shore, the South Shore, and even parts of Central Massachusetts may have appreciated far beyond what the original owner paid.
However, it’s important to understand that stepped-up basis is not always as straightforward as it sounds. The home may need an appraisal, and the value may be questioned if the IRS believes it was incorrectly reported. Additionally, if multiple heirs inherit the property, the sale proceeds and tax consequences may be divided among them depending on ownership and how the estate was structured.
This is why many families choose to work with a tax professional or estate attorney before selling an inherited property. A few correct steps upfront can prevent costly mistakes later.
Probate and Inheritance Situations That Can Affect Taxes
When selling an inherited house in Massachusetts, the taxes you may owe are often impacted by the legal process surrounding the estate.
In many cases, the property must go through probate. Probate is the court-supervised process of validating the will, identifying heirs, and distributing assets. If probate is still open, selling the home may require additional paperwork, court approval, or the involvement of an executor or personal representative.
A common situation is when multiple siblings inherit a property together. While everyone may agree that selling the house is the best option, disagreements often come up regarding the selling price, repairs, agent selection, or whether the home should be listed on the open market or sold as-is.
Another major issue is the condition of the home. Many inherited properties in Massachusetts are older homes that may have deferred maintenance, outdated electrical systems, old roofs, plumbing issues, or other repairs that were put off over time. The cost of repairs can add up quickly, and many heirs do not want to invest money into a home they never planned to own.
These factors matter because they influence the sale price and the timeline. If the home sits vacant for months while probate is pending, the property may experience additional expenses such as property taxes, insurance costs, utility bills, and general maintenance.
From a tax perspective, delays can also create confusion. For example, if an heir moves into the property and uses it as a primary residence, the tax situation may change. In some cases, it could limit the ability to claim a deductible loss if the home later sells for less than expected.
Inheriting a house can be emotional, complicated, and stressful. It’s not just about taxes, it’s also about timing, legal responsibility, and making decisions with family members who may not see things the same way.
This is why having a clear plan early on can help heirs avoid unnecessary financial and legal problems.
Selling an Inherited House As-Is vs Listing It on the Market
If you’ve inherited a property in Massachusetts, one of the biggest decisions is whether you should list it traditionally with a real estate agent or sell it as-is.
A traditional sale often involves cleaning out the property, making repairs, staging, showings, and waiting for a buyer to secure financing. While this can sometimes result in a higher price, it also comes with more time, effort, and risk. Many inherited homes need significant updates before they qualify for conventional financing, especially if the property has issues like an older roof, outdated electrical, plumbing leaks, or structural concerns.
Selling as-is is often a practical solution for heirs who want to avoid putting money into the property. In an as-is sale, the home is typically sold in its current condition without repairs, and the seller may avoid the stress of inspections, appraisal issues, or contractor coordination.
For many families, the main priority is speed and certainty. Probate can already take months, and heirs often want to close quickly once the estate is ready. They may also live out of state and not have the ability to manage a property from a distance.
This is where working with a local professional buyer can be helpful. Companies like Pegasus Home Buyers specialize in purchasing inherited houses in Massachusetts in as-is condition. This can help heirs avoid costly repairs, cleanup, and extended holding costs like taxes, insurance, and utilities.
Even if you’re considering listing the property, it can still be helpful to explore multiple options. In some cases, getting an as-is offer can serve as a backup plan, especially if the home needs major work or the family wants to avoid a drawn-out sale.
Every inherited home situation is different, and the best choice depends on the property condition, the heirs involved, and how quickly the estate needs to settle.
Reporting Sale of the Inherited House
Obviously, when you sell an inherited house, you have to report the sale and any gains or losses when you file your income tax return.
To calculate the gain or loss, you have to subtract the basis from what you received for the sale.
To report the gain or loss, you need to use the standard document for this purpose, the IRS Schedule D. You also have to include the gain or loss on your personal Form 1040 tax return.
Make sure you use the Form 1040 (and not the Form 1040A or Form 1040EZ) for the year in which you sold the inherited house.
Final Thoughts on Selling an Inherited House in Massachusetts
The tax consequences when selling a house inherited in Massachusetts can be complex and difficult to understand at best. It’s usually a good idea to find a professional to help you navigate the tax waters.
If you’ve inherited a property and you’re not sure what your next step should be, it helps to talk with local professionals who understand the Massachusetts market and the unique challenges of inherited homes.
At Pegasus Home Buyers, we work with homeowners and heirs who are dealing with probate, inherited properties, and complicated family situations. We’re happy to answer your questions, walk you through your options, and help you decide what makes the most sense for your timeline and goals.
If you’d like more information or want to explore your options, simply fill out the online form and we’ll be glad to help.