Scenario: Inherited condo
Inherited a Condo: Live In It, Rent It, or Sell?
The stepped-up basis that resets your tax liability, the 2-out-of-5-year primary residence test, HOA rental caps, and how to think clearly when emotion is loudest.
Updated 20 May 2026
The honest recommendation
Take 6 months to decide. The stepped-up basis gives you a generous tax window.
On inheritance, your cost basis in the condo is reset to the fair market value on the date of death (Section 1014). Selling within roughly 12 months means little or no capital gains tax even on a significant appreciation. That window gives you breathing room. Use 6 months to evaluate: would living in it actually fit your life? Would the local rental market support it as an investment property? Would selling and investing the proceeds beat both? Avoid making the decision in the first 30 days when grief is loudest.
Inheriting a condo triggers three distinct decisions that get conflated: a tax decision (the stepped-up basis you receive on the date of death), a use decision (live in it, rent it, sell), and an emotional decision (this was your parent's home). They are separable. The tax window is generous: you can sell within 12 to 24 months with essentially no capital gains because your cost basis is reset to the date-of-death market value. Pressure to decide quickly almost always comes from siblings or HOA dues, not from the tax code. This page covers the math, the timing, and the HOA gotchas.
Stepped-up basis (the tax fact that changes everything)
Under IRC Section 1014, when property is inherited, the heir's cost basis is reset to the fair market value on the date of the decedent's death (or alternate valuation date, 6 months later, if elected by the estate).
Practical example: parent bought condo in 1995 for $80,000. At date of death in 2026, market value is $480,000. Original embedded gain: $400,000. After stepped-up basis: your new basis is $480,000. Sell within 12 months for $485,000: only $5,000 of taxable gain, and that may be offset by selling costs.
If you instead hold for 5 years and the condo appreciates to $580,000, your taxable gain at sale is $100,000 (the appreciation since inheritance), unless you converted it to your primary residence and qualified for the Section 121 exclusion.
Source: IRC Section 1014, IRS Publication 559 (Survivors, Executors, and Administrators).
The primary residence path (Section 121)
If you decide to live in the inherited condo as your primary residence for at least 2 of the 5 years before any future sale, you qualify for the Section 121 exclusion: up to $250,000 of gain ($500,000 married filing jointly) excluded from taxes at sale. Combined with the stepped-up basis, this can shelter substantial appreciation.
Worked example: stepped-up basis $480K. You live in it 5 years, sell for $600K. Gain is $120K. Section 121 excludes the first $250K single. Taxable gain: zero.
Source: IRC Section 121, IRS Publication 523 (Selling Your Home).
The rental path: HOA caps and depreciation
Many condo HOAs cap the percentage of units that can be rented out (often 20% to 30%). If the building is at cap, you may not be allowed to rent. Verify before assuming this option exists. Even where allowed, expect to:
- Switch master insurance and HO-6 to landlord policies (HO-6 to dwelling-fire DP-3).
- Track depreciation (27.5-year straight-line for residential rental).
- Report rental income on Schedule E.
- Manage tenants, vacancies, repairs (or hire a 8% to 10% property manager).
- Lose Section 121 primary-residence eligibility unless you live in it 2 of the 5 years prior to sale.
Source: IRS Publication 527 (Residential Rental Property), state and HOA-specific rental restrictions.
Decision matrix
| Factor | Favours buy | Favours rent |
|---|---|---|
| Current housing situation | Currently renting, fits your life stage | Already own primary residence |
| Building rental cap | (N/A) | Cap full, cannot rent if you do not live there |
| Sibling co-ownership | Sole heir, no division required | Multiple heirs, easier to sell and split cash |
| Tax bracket and capital gains | Sell within stepped-up basis window | Hold long-term only if planning primary residence |