Inheriting a house in Texas: taxes, basis, and home improvements

Texas does not impose a state inheritance tax on current inheritances, and receiving a house is generally not ordinary income to you. The property's federal tax basis is usually its fair market value on the date of death. Taxes most often arise later through a sale, rental income, or continuing local property taxes.

Home improvements can affect several of those calculations, but not in the same way. A capital improvement may increase federal tax basis. A repair usually does not. A substantial addition may also affect the appraisal district's value even when it increases federal basis.

This article is general education, not tax or legal advice. Estates, trusts, community property, multiple heirs, prior gifts, non-U.S. owners, and rental use can change the result. Confirm the ownership documents, valuation, and tax treatment with a Texas estate attorney, CPA, and the local appraisal district before acting.

What taxes apply when you inherit a Texas house?

For a U.S. citizen or resident who dies in 2026, Form 706 generally must be filed when the gross estate, increased by adjusted taxable gifts and the specific gift-tax exemption, exceeds $15 million. A timely Form 706 is also required to elect portability of a deceased spouse's unused exclusion, regardless of estate size. Different filing rules apply to nonresident noncitizens with U.S.-situated assets.

What is the tax basis of an inherited house?

Basis is the starting amount used to calculate gain or loss and, when applicable, depreciation. For inherited property, the basis is generally the house's fair market value on the date of death. This is often called a stepped-up basis, although basis can also decrease when the date-of-death value is lower. An executor may instead use an alternate valuation date in a qualifying estate-tax filing, and some special cases use other values.

If the estate was required to file Form 706, a beneficiary may receive Schedule A of Form 8971 and may be required to use the reported estate-tax value. This is one reason the date-of-death valuation should be established and preserved before memories fade or the house changes.

Does Texas community property receive a full basis adjustment?

Texas is a community-property state. When the requirements described by the IRS are met, the basis of the entire community-property interest can generally be adjusted at the first spouse's death, including the surviving spouse's half. Title, marital-property classification, trusts, and separate-property facts matter, so this is an area for professional review rather than assumption.

Special rules can apply to property transferred back to a prior donor within one year, certain trusts, and special-use valuations. Obtain professional advice when those facts exist.

How is gain calculated when the inherited home is sold?

At a high level:

Sale price - selling expenses - adjusted basis = gain or loss

Inherited capital property receives long-term holding treatment regardless of how long the beneficiary or estate held it. That does not mean the sale is tax-free. It describes the character of the gain or loss.

Long-term classification does not make every loss deductible. If an estate holds the residence for investment and sells it, a loss may be a deductible capital loss. If the property is held for personal use, a loss generally is not deductible. The legal owner and the property's actual use determine the result.

Who reports the sale also depends on legal ownership at closing. Texas law generally vests a decedent's property immediately in devisees or heirs, subject to estate debts, while an appointed personal representative may have possession and authority during administration. Before listing, improving, leasing, or selling the property, a Texas estate attorney and the title company should confirm the legal owner and authorized signer. The estate reports the sale when it is the legal owner for federal tax purposes; otherwise, beneficiaries generally report their respective shares.

Consider a simplified example. Assume one beneficiary owns the entire property when the work is performed, personally pays $40,000 of qualifying capital-improvement costs, receives no reimbursement, subsidy, credit, or deduction for those costs, and sells without intervening rental use:

The calculation is:

$620,000 - $30,000 - ($500,000 + $40,000) = $50,000

The $50,000 is a simplified gain, not the tax bill. Depreciation, casualty adjustments, credits, subsidies, partial interests, estate-level activity, and other facts can change the basis or taxable amount.

If an heir later uses the property as a main home, the Section 121 exclusion may become relevant. The general rules require at least two years of ownership and two years of principal-residence use during the five years before sale, plus compliance with the prior-sale look-back rule. Inheritance alone does not satisfy those tests. Filing status and other eligibility rules also apply.

A surviving spouse may be able to count the deceased spouse's ownership and residence periods and, when additional requirements are met, may qualify for a larger exclusion when the sale occurs within two years after death. Rental use, nonqualified-use periods, and depreciation can reduce the available exclusion.

How do home improvements change inherited basis?

The timing of the work is critical.

How are improvements made before death treated?

The usual starting point is fair market value at death. That value should already reflect the home's condition and completed improvements on that date. Do not add the former owner's historical project costs a second time to a date-of-death value.

Which improvements made after death increase basis?

After death, a qualifying capital expenditure increases the adjusted basis of the taxpayer or entity that owns the property and properly capitalizes the cost. If an estate, trust, or multiple heirs own the home, one heir's payment does not automatically increase every owner's basis. Document who authorized and paid for the work, whether anyone was reimbursed, each owner's share, and how the estate, trust, or owners treated the expenditure.

The IRS generally treats work as an improvement when it materially adds value, substantially extends useful life, or adapts the home to a new use. Actual material, contractor labor, design, permit, and directly related project costs may increase basis. The value of your own labor does not.

Examples that can qualify include:

• adding a bedroom, bathroom, or other permanent space;
• replacing an entire roof;
• installing new plumbing, wiring, or central cooling;
• building a permanent fence or paving a driveway; and
• completing a broad restoration in which related repair work is part of the larger project.

Only costs for improvements still part of the home generally remain in basis. A separately tracked improvement added after death generally stops being part of basis when it is removed or replaced. Do not subtract the former owner's historical cost from an inherited date-of-death value. Allocating inherited fair-market-value basis to a component later removed requires support and should be reviewed by the tax preparer.

Do repairs increase the inherited home's basis?

A repair keeps the home in ordinary operating condition. Painting, fixing gutters, patching a leak, repairing floors, or replacing a broken window pane generally does not increase basis when performed on its own.

The same task can receive different treatment when it is part of a larger restoration. For example, painting one room is usually maintenance. Painting completed as part of a full renovation may be part of the improvement. Keep the complete scope and ask the tax preparer to classify the work from the facts rather than from the contractor's invoice label.

Who should approve and pay for work during estate administration?

Before hiring anyone, identify who has legal authority over the property. That may be an executor, administrator, trustee, surviving owner, or beneficiary after distribution. Multiple heirs agreeing informally does not replace the authority required by the estate documents and Texas law.

Record:

• who owned the property when the cost was incurred;
• who approved the work;
• who paid each invoice;
• whether the estate reimbursed an heir;
• the date the property was distributed;
• each heir's ownership percentage; and
• whether a later buyout changed the interests.

These facts help the attorney and CPA determine whether a cost belongs to the estate, a trust, one beneficiary, or all owners. They also reduce conflict when one heir funds work before a sale or distribution.

What changes if the inherited house becomes a rental?

Rent from inherited property is generally taxable. If the owner first holds the property for personal use and later converts it to rental use, the building's depreciation basis is generally the lesser of its adjusted basis or fair market value on the conversion date. If the property is placed directly into rental service without intervening personal use, that conversion limit generally does not apply. In either case, land must be allocated separately because land is not depreciable.

Rental repairs may be deductible when capitalization rules do not require otherwise; improvements generally must be capitalized and depreciated. Depreciation allowed or allowable reduces basis even if the owner failed to claim it. Rental use, nonqualified-use periods, and depreciation can also limit the home-sale exclusion and affect tax on a later sale.

What happens to the Texas homestead exemption?

Texas does not levy a statewide property tax. County appraisal districts determine property values, and chief appraisers decide exemption eligibility. Local taxing units set tax rates, while local tax offices calculate and collect the resulting taxes. An heir who owns an interest and uses the house as a principal residence may qualify for a residence homestead exemption.

If the heir is not listed as an owner in the county records, the Texas Comptroller says the appraisal district may require:

• an affidavit establishing the ownership interest;
• the prior owner's death certificate;
• the property's latest utility bill; and
• a reference to an available court record concerning ownership.

Other heir-occupants may also need affidavits. Apply with the appraisal district rather than assuming the former owner's exemption automatically settles the new ownership.

Can renovations increase the local property appraisal?

Yes. Texas's 10% residence-homestead limitation applies to appraised value, not market value or the final tax bill, and generally requires the home to qualify for the exemption in both the preceding and current year. An heir should not assume the decedent's capped appraised value automatically continues. The appraisal district should confirm whether and when the limitation applies to the new owner.

When the limitation applies, the market value of a qualifying new improvement can be added outside the prior-year 10% component.

The Texas definition excludes repairs and ordinary maintenance. A new addition, converted space, or other work that increases market value may be treated differently from replacing damaged trim or servicing an existing system.

This creates two separate records:

1. Federal basis record: what the IRS recognizes as additions and reductions to basis.
2. Local appraisal record: how the appraisal district values the property and classifies new improvements.

The same project can increase federal basis and local appraised value. Neither increase is necessarily equal to project cost.

What records should heirs keep?

Create a permanent property file with:

• the death certificate and will, trust, or transfer documents;
• probate orders, deeds, and ownership percentages;
• records identifying the legal owner and authorized signer when work or a sale occurred;
• estate and trust income-tax returns, Schedules K-1, and Form 706 when applicable;
• contribution or reimbursement agreements among heirs;
• the date-of-death appraisal and supporting comparable sales;
• Schedule A of Form 8971 if one was issued;
• the property's value and basis workpapers;
• project scopes, invoices, proof of payment, and completion dates;
• permits, inspections, plans, photos, and warranties;
• insurance payments, rebates, subsidies, and tax credits;
• land-and-building allocations and depreciation allowed or allowable;
• occupancy and rental-use dates relevant to the home-sale exclusion;
• homestead applications, appraisal notices, protests, and local property-tax statements; and
• sale statements and selling expenses.

Keep basis records for as long as the property is owned and through the period applicable to the return reporting its sale. A house may be sold years after the inheritance, when recreating the date-of-death value or improvement history is difficult.

How should heirs decide whether to improve before selling?

First decide whether the home will be sold, occupied, or rented. Then separate three goals:

1. Preserve the property: stop leaks, secure the home, maintain insurance, and prevent further damage.
2. Make the home market-ready: correct buyer objections and finish incomplete work.
3. Change the home: add space, alter systems, or undertake a larger renovation.

Do not renovate simply because improvement costs may increase basis. A $40,000 project that adds $20,000 in market value still leaves the owners economically behind even if the full qualifying cost increases basis. Review which home improvements actually add value in Austin before making a resale-driven decision.

Where Completa fits

When authorized owners decide to improve the home, the first practical need is a written description of the work and a realistic starting estimate. Completa is an Austin-first home-project platform. It helps property owners describe the work and see a starting estimate before contractor review. A contractor can review and confirm or counter the scope and price before work begins.

Keep invoices, permits, approvals, payment evidence, and completion records in the estate's permanent property file. Clear project records cannot replace professional tax advice, but they give the professionals the facts needed to apply it. See the property-owner options when the authorized owner is ready to organize the work.