An inherited property that you do not live in is considered an investment and the sale follows the rules of any sale. You get a stepped up basis in the property to the Fair Market value at time of death and your holding period is automatically long term. Any gain is taxed at a long term capital gain and any loss is LT capital loss. You can take $3,000 each year against ordinary income and can carry forward the loss until used up. see http://www.nolo.com/legal-encyclopedia/if-you-inherit-home-do-you-qualify-the-home-sale-tax-exclusio...
How the Stepped-Up Basis Rules Affect People Who Inherit Property
"Basis" means an asset's cost for tax purposes. To determine whether you have a profit or less when you sell an asset, you subtract its basis from the sale price. If you have a positive number, you have a gain. If you have a negative number, you have a loss.
The basis of a home you buy or build is its cost, plus any improvements you make while you own it. SeeDetermining Your Home's Tax Basis for details.
However, a home's tax basis is determined in a different way when someone inherits a home after the owner dies. When you inherit property after the owner dies you automatically receive a "stepped-up basis." This means that the home's cost for tax purposes is not what the now-deceased prior owner paid for it. Instead, its basis is its fair market value at the date of the prior owner's death. This will usually be more than the prior owner's basis.
The bottom line is that if you inherit property and later sell it, you pay capital gains tax based only on the value of the property as of the date of death.
Example: Jean inherits a house from her father George. He paid $100,000 for it over 20 years ago. George made $20,000 in improvements over the years, so his 's tax basis in his home just before George died was $120,000. However, when Jean inherits the home its basis is stepped-up to its fair market value on the date of George's death. Jean has the home appraised and this value is set at $500,000. Jeans sells the house for $505,000 a few months after she inherits it. Her tax basis in the house is $500,000. She subtracts this amount from the sales price to determine her taxable gain: $505,000 sales price - $500,000 basis = $5,000 gain.
If you sell an inherited home for less than its stepped-up basis, you have a capital loss that can be deducted (assuming you don't use the home as your personal residence). However, only $3,000 of such losses can be deducted against your ordinary income per year. Any excess must be carried over to future years to be deducted.
See also http://www.irs.gov/publications/p544/ch04.html#en_US_2013_publink100072633
Disclaimer: Not a tax professional. Information gathered from internet links. Anything dated in June 2019 was posted in prior years and is before the 2019 limits and changes.
