Inherited House Sell vs Rent 2026 Step-Up Basis Calculator
Inherited house sell vs rent 2026 is a tax-driven decision: selling immediately uses the IRC §1014 stepped-up basis (FMV at death) so capital gain is near zero, while renting locks in that basis but exposes future appreciation to taxable gain when sold later. This tool compares net cash from sale today vs total returns from renting for a chosen holding period.
| Sell Now — IRC §1014 Step-Up | |
| Inherited FMV (new basis) | — |
| Sale price (today) | — |
| Selling costs | — |
| Capital gain (step-up applied) | — |
| Capital gain tax | — |
| Mortgage payoff | — |
| Net cash from sale today | — |
| Rent + Sell Later | |
| Net rental income (after-tax, total) | — |
| Future sale price (after appreciation) | — |
| Future capital gain (basis stays at FMV) | — |
| Future capital gain tax | — |
| Depreciation recapture (25%) | — |
| Total proceeds (rent + future sale, after-tax) | — |
| Difference (rent − sell now) | — |
Inheriting a house creates a one-time tax window. Under IRC §1014(a), the heir's basis is reset to the property's fair market value on the decedent's date of death (or alternate valuation date). Sell within months of inheriting and capital gain is typically near zero. Hold and rent it, and every dollar of appreciation from inheritance forward becomes taxable when you eventually sell — plus depreciation recapture at 25% under IRC §1250.
Sell Now: Why the Step-Up Wins Short-Term
The §1014 step-up is the single largest tax benefit in inheritance planning. Example: parent bought home for $80K in 1995, FMV at death is $450K. If you sell the day after probate clears for $450K, your gain is $0 (sale price minus stepped-up basis minus selling costs is roughly break-even). Sell three years later for $510K and you owe long-term capital gain tax on $60K — about $9,000 at the 15% federal rate, more if NIIT applies. The longer you wait, the more of the appreciation is taxed.
Rent It Out: The Income vs Lost Step-Up Trade
Renting generates cash flow but converts the asset to an investment property. You'll pay ordinary income tax on net rental income (rent minus operating costs, mortgage interest, insurance, taxes, repairs, depreciation). You can deduct depreciation over 27.5 years (residential, IRC §168), which lowers current taxable income but creates a future §1250 recapture of up to 25% on the cumulative depreciation when you sell. If you die owning the property, your heirs get another §1014 step-up — but for you personally, the basis is frozen at the original FMV.
The Math: When Rent Beats Sale
Rent generally wins when: (1) net rental yield exceeds 5–7% of FMV after expenses and tax, (2) you hold long enough (typically 8+ years) for compounded after-tax rent to overcome future capital gain tax, (3) appreciation is moderate (not so high that capital gain tax eats the rental advantage), and (4) you can absorb vacancy and repair risk. Sell wins when: rental yield is weak (under 4%), the local market is flat or declining, you have a mortgage with no equity buffer, or you need the cash for other goals.
Other Factors Beyond Tax
(1) Probate timing — you can't legally sell until probate distributes title (3–18 months). (2) Co-heirs — multiple heirs need consensus to keep and rent. Most disagreements end in forced sale via partition action. (3) Insurance — landlord policies cost more than owner-occupied. (4) §121 exclusion — if you move in and use it as primary residence for 2 of 5 years, you can exclude $250K ($500K married) of gain. (5) State income tax on rent — varies by state, sometimes wipes out the rental advantage.
Last updated May 2026. Sources: IRC §1014, §1250, §168, §121.