Inheritance Doesn’t Work the Way You Think It Does

So you inherited the family farm… now what?

Summer often brings time spent on the family farm, reunions in the farmhouse, or weekends helping out with the chores. When a loved one passes away, these places take on a different emotional and financial weight. If you're considering selling an inherited property, there are a few important things to understand first.

👉 While this post focuses on family farms, the advice applies to all inherited property.

What Is Inheritance? (And When Does It Actually Happen?)

People often assume that inheritance begins before someone passes away, especially if a parent or grandparent tells them they’ll “be getting the farm one day.”

However, legally, you don’t inherit anything until the owner passes away. Until that moment, the property still belongs to them, even if you’ve been maintaining it, paying taxes, or living there.

This distinction matters because the date of death is what determines your cost basis in the property for tax purposes.

How Taxes Work When You Sell an Inherited Property

When you inherit a property, you generally receive what's called a “step-up” in basis. This means the property's value is adjusted to its fair market value as of the owner’s date of death. If you sell it for close to that value, your taxable gain could be little to nothing, even if the person who left it to you originally paid far less for it.

📌 Example 1
Your parents bought the farm in 1980 for $40,000. When your last surviving parent passed away, the farm was worth $300,000, and you inherited it. Your new cost basis is $300,000 due to the step-up in basis.

If you sell the farm for $310,000, you will only owe taxes on your $10,000 gain. You will not owe taxes on the $270,000 difference from the original purchase price.

📌 Example 2

If the farm was given to you before your parents passed away, the situation would be very different. In this case, you would take on their cost basis of $40,000.

When you sell the farm for $310,000, you would owe taxes on the $270,000 gain - the difference between what your parents paid and your sale price. This is known as a carryover basis, and it often results in a much larger tax bill compared to an inherited property.

This is why how you receive property is so important. It could mean the difference between owing a few thousand dollars in taxes versus tens of thousands in taxes.

Other Things to Consider Before You Sell

• Multiple heirs? You may need to agree jointly on the sale and how to divide proceeds.

• Rental history? If the farm was ever used for short-term rental income, that could affect taxes.

• Ongoing costs: Property taxes, upkeep, and capital gains could make holding it long-term more expensive than expected.

Feeling Overwhelmed? We Can Help.

Selling a property you’ve inherited can be both emotional and confusing.

If you’re unsure how the taxes will shake out, or if now is the right time to sell, we’re happy to walk you through your options. A little planning now can save you from big surprises later.

👉 Our tax planning services are designed to give you clarity and peace of mind, so you're never caught off guard by a surprise tax bill. Be fully prepared; talk with one of our experts before you sell.

Sources & Additional Resources:

Gifts & inheritances from Internal Revenue Service

Is the inheritance I received taxable? from Internal Revenue Service

What is the difference between carryover basis and a step-up in basis? from Tax Policy Center