If you've inherited a home in New Jersey, there's a federal tax rule that could save you $20,000, $50,000, or even more — but most heirs don't know it exists until after they've already made decisions. That rule is called stepped-up basis.
What Is Basis?
In tax law, your "basis" in a property is generally what you paid for it. When you sell, you pay capital gains tax on the difference between your sale price and your basis. So if someone bought a home for $90,000 in 1985 and sells it today for $650,000, they'd owe capital gains tax on $560,000 of gain — potentially $84,000 or more in federal and NJ state taxes.
The Stepped-Up Basis Rule (IRC Section 1014)
When you inherit property, the tax law treats your cost basis as the fair market value of the property on the date of the person's death — not what they originally paid for it. This is called a "step-up" in basis.
Real example: Your parent bought their Morris County home for $90,000 in 1985. At the time of their death in 2024, it was worth $680,000. You inherit it and sell it six months later for $695,000.
- Your stepped-up basis: $680,000 (value at death)
- Your taxable gain: $695,000 - $680,000 = $15,000
- Without step-up, gain would have been: $605,000
- Tax savings from stepped-up basis: potentially $60,000–$90,000+
Does This Apply to New Jersey?
Yes — stepped-up basis is a federal rule (IRC Section 1014) that applies to all inherited property in the US, including New Jersey. However, NJ has its own inheritance tax (separate from capital gains tax) that applies to certain beneficiaries. Siblings, nieces, nephews, and non-family members may owe NJ inheritance tax of up to 16% on the inherited value — this is different from and in addition to any federal capital gains tax.
Direct descendants (children, grandchildren) and spouses are exempt from NJ inheritance tax. Always confirm your relationship category with an NJ estate attorney.
Getting the Stepped-Up Basis Right
The key is establishing the date-of-death fair market value properly. This typically requires:
- A formal appraisal from a certified NJ appraiser
- Comparable sales data from around the date of death
- The appraisal reported on the estate tax return (if required)
Don't skip the appraisal. If the IRS questions your basis, you need documentation. A qualified appraiser costs $400–$800 and can save you tens of thousands.
What If I Sell Quickly?
Heirs often feel pressure to sell quickly to avoid carrying costs (taxes, maintenance, utilities). The good news: if you sell within a year of inheriting, any gain above the stepped-up basis is taxed at long-term capital gains rates (0%, 15%, or 20% depending on your income) — not the higher short-term rates — regardless of how quickly you sell. This is a specific rule for inherited property.
The Bottom Line
Stepped-up basis is one of the most valuable tax benefits available to heirs. Before you accept a cash offer, list with an agent, or make any decisions about an inherited NJ property, make sure you have the stepped-up basis properly documented. The difference can be six figures.
This article is educational only. Consult a licensed CPA or estate attorney for advice specific to your situation.