The short answer
Usually there is little or nothing to defer. Your basis is the property's fair market value at the date of death under section 1014, so a sale a few months later taxes only the change in value since death, and commissions and closing costs often turn that into a small loss. If the executor elects alternate valuation under section 2032, property sold within six months is valued at its sale date and the basis becomes roughly the sale price. That election is only allowed when it lowers both the gross estate and the estate tax, so estates that owe no estate tax cannot use it.
At a glance
| Starting basis | Fair market value at the date of death |
|---|---|
| Alternate valuation date | Six months after death, or the sale date for property sold sooner |
| Who can elect it | Only estates where it lowers both the gross estate and the estate tax |
| Holding period | Automatically long-term for inherited property |
| Taxable amount | Sale price, less selling costs, less date-of-death value |
| Loss on a former home | Deductible only if the estate held it for investment, not for a family member's use |
| Estate tax return filed | Your basis must be consistent with the final estate tax value |
The step-up leaves only post-death appreciation to tax
Section 1014(a)(1) sets the basis of inherited property at its fair market value on the date of death. The decedent's purchase price, improvements and depreciation stop mattering, so the gain on a later sale is measured only from that new starting point.
Section 1223(9) treats inherited property sold within one year of death as held for more than one year, and Publication 559 applies the same rule to the estate. Any gain is long-term from day one.
In a flat or soft market, a sale three or four months after death often lands close to the appraisal. Once the commission and closing costs come out of the amount realized, the result can easily be a loss rather than a gain.
Alternate valuation is an estate tax election, and most estates are not allowed to make it
Under section 2032(a), an executor may value the whole gross estate six months after death instead of at death, with property sold, exchanged or distributed during those six months valued on the date it leaves the estate. Basis follows the election: section 1014(a)(2) uses the alternate value when the election is made.
Section 2032(c) allows the election only if it decreases both the value of the gross estate and the estate tax. The Instructions for Form 706 add that it applies to all property, not part of it, must be made on a return filed no later than one year after the due date, and cannot be revoked.
With the 2026 basic exclusion at $15,000,000, most estates owe no estate tax and cannot elect. For them the date-of-death appraisal is the basis, and the gain or loss on a quick sale is simply the gap between that appraisal and the net sale price.
Worked example: a quick sale usually produces a small capital loss
Hypothetical, round numbers; run your own numbers with your CPA. A mother dies on February 1, 2026, owning a house appraised at $600,000. The estate lists it and closes on June 15 for $615,000, paying $37,000 in commission and closing costs.
The amount realized is $578,000, so the estate has a $22,000 loss against its $600,000 basis. If the estate held the house to realize its value through sale, Publication 559 treats it as a capital asset held for investment and the loss can be deductible, even though it had been the decedent's residence.
If the market had run up and the house sold for $660,000, the amount realized would be about $620,000 and the long-term gain about $20,000. That is the entire amount an exchange could defer.
- Date-of-death appraisal: $600,000 basis.
- Net sale at $615,000: about $22,000 capital loss.
- Net sale at $660,000: about $20,000 long-term gain.
Where the loss or gain lands depends on who owned the property and how it was used
Publication 559 says title to real property is often vested in the beneficiaries rather than the estate, so local law decides whether the estate or the heirs report the sale. Check the deed and the probate order before the closing statement is drawn.
Use matters for losses. Publication 559 says that if the house was kept for a beneficiary to live in rent free and then sold without being converted to investment use, a gain is taxable but a loss is not deductible. A loss in the estate's final year can pass through to the beneficiaries who succeed to the property.
If an estate tax return was required, Publication 551 says certain beneficiaries must use the value reported to them on Schedule A of Form 8971. A quick sale at a higher price does not let you pick the higher number.
What to do before you list, and when an exchange still makes sense
Order a date-of-death appraisal before listing, and keep the comparable sales it relies on. Then estimate the net proceeds against it; if the result is a loss, do not set up an exchange, because section 1031 also defers losses you would rather deduct, as covered in exchanging at a loss.
If the property is a rental or land and the sale will show real appreciation, the estate or heirs can exchange it like any other investment property. The executor's 1031 guide covers who signs, and when a small gain is worth exchanging covers the cost side.
A Delaware statutory trust interest, treated as real property for exchange purposes by Rev. Rul. 2004-86, is one way heirs who do not want to manage property can complete an exchange. With a small post-death gain, the fees and lock-up often outweigh the tax, so run both numbers; the traditional DST page explains the structure.
Related questions
Does the sale price replace the appraisal as our basis?
No, unless alternate valuation was elected. The basis is fair market value at death under the willing-buyer test in Reg. section 20.2031-1(b), so keep a qualified date-of-death appraisal.
Can we elect alternate valuation just to raise our basis?
No. Section 2032(c) allows the election only when it lowers both the gross estate and the estate tax, so it can only reduce values, and only estates owing tax can make it.
Is the gain short-term because we only owned it for four months?
No. Section 1223(9) treats inherited property as held for more than one year, so any gain is long-term.
Can heirs deduct a loss on a parent's house?
Yes if it was held for investment or sale, not if a family member used it personally. Publication 559 draws that line for estates selling a decedent's residence.
Should we set up a 1031 just in case?
Only if the net sale price is likely to exceed the appraisal by enough to cover the cost of an exchange. If the sale will show a loss, an exchange only defers a deduction.
Sources
Checked against these publications on September 30, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.
- 26 U.S.C. Section 1014, basis of property acquired from a decedent
- 26 U.S.C. Section 2032, alternate valuation
- Treas. Reg. Section 20.2032-1, alternate valuation
- Treas. Reg. Section 20.2031-1, valuation of property
- 26 U.S.C. Section 1223, holding period of property
- IRS, Instructions for Form 706
- IRS Publication 559, Survivors, Executors, and Administrators
- IRS Publication 551, Basis of Assets
- 26 U.S.C. Section 1031, like-kind exchanges
- IRS, Rev. Rul. 2004-86 in Internal Revenue Bulletin 2004-33