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The key to understanding how inherited homes get taxed is understanding the calculation of basis. Basis refers to the cost of the asset for the purpose of calculating capital gains and other taxes.

When someone dies, the IRS increases the property's basis up to its fair-market value at the time of the person's death. In other words, if someone bought a house 30 years ago for $50,000 but it was worth $200,000 when they died, the IRS would value the house at $200,000 for capital gains purposes.

If you turned your inherited home into an investment property, you won't be able to take advantage of the IRS' favorable treatment of gains on personal residences, and you'll need to pay capital gains taxes. However, you'll only pay capital gains taxes on the difference between your final selling price and the stepped-up basis at which you inherited the property.

Unless the property goes up in value very quickly or you hold the home for a long time, you most likely will have very little tax liability. One thing to be wary of is that if you hold the home for less than one year after inheriting it, your gain may be treated as a short-term capital gain instead of a long-term gain. Short-term gains are taxed at higher rates than long-term gains.
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