If you’ve inherited a house, land, or other real estate in Maryland, you might not owe tax right away but if you later sell it, capital gains tax could apply. Understanding capital gains tax on inherited property in Maryland matters because it affects how much money you keep from the sale. It’s not about taxes on the inheritance itself (Maryland doesn’t have an inheritance tax on most transfers between close relatives), but about what happens when you turn that inherited asset into cash.

What does “capital gains tax on inherited property” mean in Maryland?

Capital gains tax is what you pay on the profit from selling an asset you’ve held for more than a year. For inherited property, the IRS gives you a “stepped-up basis” meaning your cost basis is generally the fair market value of the property on the date the original owner died. You only pay tax on the increase in value after that date, not the entire appreciation over decades. This often cuts the taxable gain significantly or eliminates it entirely.

When does this tax actually apply?

You only owe capital gains tax if you sell the inherited property for more than its stepped-up basis. For example: Your parent passed away in June 2023, and the home was appraised at $425,000 then. If you sell it in 2024 for $460,000, your taxable gain is $35,000 not the full difference between what your parent paid and the sale price. If you sell for $420,000, there’s no capital gain (and no federal or Maryland capital gains tax). Maryland follows federal rules for capital gains calculation, so no separate state-level gain computation is needed just report it on your Maryland income tax return as part of your federal adjusted gross income.

How is the stepped-up basis determined and what proof do you need?

The stepped-up basis relies on a reliable valuation as of the date of death. A professional appraisal is the strongest evidence, especially for homes or commercial property. County tax assessments or recent comparable sales can help support it, but they’re not substitutes for an appraisal if the IRS asks. Keep records of the appraisal, death certificate, and any documentation showing the property’s condition or use at the time. If the estate was large enough to file a federal estate tax return (Form 706), the value reported there becomes your official basis so it’s worth checking whether that return was filed. You can learn more about related estate filing requirements in our guide on Maryland estate tax forms required during settlement.

What’s the difference between inheritance tax and capital gains tax in Maryland?

They’re separate taxes with different triggers. Maryland has both an estate tax and an inheritance tax but the inheritance tax only applies to certain beneficiaries (like friends or distant relatives) and is paid by the recipient, not the estate. Spouses, children, parents, and siblings are exempt. Capital gains tax, however, applies only if you sell the inherited property at a profit and it’s owed by you personally, based on your income level and holding period. You can see how inheritance tax calculations work in practice in our post on how to calculate inheritance tax in Maryland.

Common mistakes people make

  • Assuming the original purchase price is their basis. That’s incorrect you start from the date-of-death value, not what the deceased paid.
  • Forgetting to account for selling costs. Real estate commissions, legal fees, and title insurance reduce your taxable gain. Don’t subtract them from the sale price before calculating gain include them in your “selling expenses” on Schedule D.
  • Misclassifying improvements vs. repairs. Only permanent improvements (e.g., a new roof, added bathroom) increase your basis. Routine repairs (e.g., repainting, fixing a leaky faucet) don’t.
  • Delaying the sale without reviewing tax implications. Holding longer than necessary doesn’t always help especially if maintenance costs pile up or market conditions shift.

Who handles these tax questions the executor or the heir?

The executor or personal representative of the estate is responsible for settling debts, filing estate tax returns, and distributing assets but once the property is transferred to you, responsibility for capital gains tax shifts to you. The executor may provide documentation like the date-of-death value or a copy of Form 706, but they aren’t responsible for your future capital gains reporting. You’ll want to review the list of tax responsibilities for a Maryland estate executor to understand where their role ends and yours begins.

One practical next step

Before listing inherited property for sale, get a written appraisal dated as close as possible to the decedent’s date of death even if the estate didn’t require one. If the person died recently, contact a local certified appraiser who works with probate cases. Then, compare that value to current market listings in the same neighborhood. If the gap is narrow, your potential capital gain may be small or zero. For reference, the IRS provides guidance on basis and inherited property in Publication 559.