Estate Planning & Probate

Pennsylvania Inheritance Tax on Real Estate

---

Does this sound like your situation?

I’m selling inherited property and don’t know what the tax will be at closing
The inheritance tax escrow is calculated on the full estate value, not just the property being sold. Knowing the number before listing protects what you walk away with.

The title company is holding escrow and I don’t understand why
Pennsylvania inheritance tax creates a statutory lien on estate property. Title companies will not issue insurance until the tax obligation is resolved.

The estate has no cash and the house is the only asset
When real estate is the primary asset there is no liquid cash to pay the tax before the sale closes. That sequencing problem has to be addressed before listing.

I missed the three-month discount window
The five percent discount closes permanently at three months. If the window has passed the tax is still owed and interest begins accruing after nine months.

Multiple heirs inherited the property and we can’t agree
When beneficiaries cannot agree on what to do with inherited real estate the tax still accrues and the property still carries costs. The disagreement has a price.

I need to know my stepped-up basis before I sell
The stepped-up basis equals fair market value at the date of death. Without a documented appraisal the IRS can challenge the basis you claim on the sale.

You do not need to have filed anything before calling.

Whether property passed through the estate or directly to a beneficiary by survivorship or TOD deed, the inheritance tax obligation follows the transfer. That obligation has to be addressed before most transactions can proceed.

Lebovitz & Lebovitz, P.A. advises Pittsburgh and Western Pennsylvania executors, administrators, and beneficiaries on Pennsylvania inheritance tax rates and deadlines for real estate — including valuation, timing, and the practical steps required before property can be sold or transferred. Stephen H. Lebovitz has handled estate administration and inheritance tax matters for Pittsburgh-area families for more than three decades.

Does Pennsylvania Inheritance Tax Apply to Real Estate?

Yes. Pennsylvania inheritance tax applies to transfers of real property regardless of how the property passes. Property that moves through the probate estate is subject to the tax. So is property that passes directly to a surviving joint tenant or to a named beneficiary under a TOD deed. The tax attaches to the transfer of the property, not to whether the property moved through probate. A beneficiary who receives a house by survivorship or TOD deed owes inheritance tax on that transfer — the executor still has to report it on the REV-1500, and the tax still has to be paid.

The tax rate depends on the relationship between the decedent and the beneficiary. Transfers to lineal descendants are taxed at 4.5 percent. Transfers to siblings are taxed at 12 percent. Transfers to unrelated beneficiaries are taxed at 15 percent. Transfers to surviving spouses are exempt. For a full explanation of rates, exemptions, and filing obligations, see our Pennsylvania inheritance tax overview. For who bears the legal obligation when property passes outside the estate, see our page on who pays Pennsylvania inheritance tax. For how TOD deeds, joint tenancy, and other non-probate transfers interact with estate administration, see our page on TOD accounts, POD designations, and joint accounts in Pennsylvania.

How Real Estate Is Valued for Inheritance Tax

Pennsylvania inheritance tax on real estate is calculated based on the fair market value of the property at the date of death — not the county assessed value and not the sale price if the property sells later. Fair market value is what a willing buyer would pay a willing seller in an arm’s length transaction. That standard requires a formal appraisal in most estates with real property.

County assessed values almost always differ from fair market value and are not an acceptable substitute on the REV-1500. An executor who uses the assessed value rather than an appraised fair market value creates a filing problem. The Pennsylvania Department of Revenue may challenge the valuation, which delays resolution of the tax and, in turn, delays any transaction involving the property. If the estate disputes the Department’s valuation, that dispute has to be resolved before the tax obligation is final.

Can You Sell Inherited Property Before Paying the Tax?

In practice, closing often depends on the status of the inheritance tax return, not just the buyer and seller. Title companies and lenders routinely require evidence that the REV-1500 has been filed before issuing title insurance or approving a refinancing. In many transactions, they require evidence of payment — not just filing. An estate that has not yet addressed the inheritance tax return will find that most buyers and lenders cannot proceed to closing.

Pennsylvania inheritance tax creates a statutory lien on estate property under 72 P.S. § 9109. That lien does not permanently prohibit a sale, but it does mean title companies will not issue title insurance on property with an unresolved tax obligation. Without title insurance, most residential transactions cannot close. Executors and beneficiaries who want to sell inherited property should address the REV-1500 filing early — before the property is listed, not after a buyer is found.

Timing Issues and the Three-Month Discount

Pennsylvania offers a five percent discount on inheritance tax paid within three months of the date of death. On a $300,000 property transferred to a child at the 4.5 percent rate, the tax is $13,500. Paying within three months saves $675. The window closes whether or not a filing extension has been requested. Estates with sufficient liquid assets should pay within the three-month window as a matter of routine.

The problem in many estates is that the real estate is the primary asset. There is no liquid cash to pay the inheritance tax because everything is tied up in the property. The estate cannot pay within three months because it has not yet sold the property, and it cannot sell the property efficiently because the tax is not resolved. The discount is lost, interest begins accruing after nine months, and the transaction is delayed until both the filing and the liquidity problem are addressed.

The Closing Table Is the Wrong Place to Learn About the Tax

Most beneficiaries selling inherited property focus on the listing price, the offer, and the closing date. The inheritance tax calculation happens in the background until the title company produces the escrow figure. At that point the transaction is already in motion, the buyer has financing locked, and the seller is looking at a holdback they did not plan for. The escrow is not a surprise to anyone who ran the numbers in advance. It is only a surprise to someone who did not. Getting the REV-1500 filed and the tax calculated before the property goes on the market means walking into the closing knowing exactly what you will net, not finding out when it is too late to adjust.

When Real Estate Creates Administration Problems

These issues are common when real estate is the primary asset in an estate. When multiple beneficiaries inherit a property and one wants to sell while another does not, the executor cannot force a resolution. If the beneficiaries cannot reach agreement, a court partition proceeding may be the only option — adding time, cost, and conflict to an already delayed administration.

When the estate has no liquid funds to pay the inheritance tax, the executor faces a sequencing problem. The tax is due before the estate can distribute assets. But the only asset is the property, and the property cannot move efficiently until the tax is resolved. This deadlock has to be broken through an estate loan, a sale structured to allow time for tax resolution, or court intervention. Executors who identify this problem early can plan around it. Executors who discover it after the nine-month deadline face added interest exposure and fewer options for resolution. For what executors are responsible for during administration, see our page on executor duties in Pennsylvania. For how non-probate transfers — including joint tenancy and TOD deeds — affect the tax and administration, see our page on TOD accounts, POD designations, and joint accounts in Pennsylvania. For how the overall administration process works, see our page on estate administration and probate in Pennsylvania.

What to Address Early

Once a transaction is delayed, options narrow quickly. Executors handling estates with real property should take four steps early: obtain an appraisal to establish fair market value at the date of death, determine whether liquid assets exist to pay the tax within three months, assess whether all beneficiaries are aligned on what happens to the property, and file the REV-1500 before any sale or refinancing is scheduled.

Addressing the tax before scheduling the transaction prevents the most common delays. A buyer found before the inheritance tax is addressed is a buyer who may not wait. A refinancing scheduled before the REV-1500 is filed is a refinancing that will not close on time. The inheritance tax is not a step that follows the transaction — it is a condition that precedes it.

Stepped-Up Basis When You Sell Inherited Property

Inherited property receives a new cost basis equal to its fair market value at the date of death under IRC § 1014. That reset basis is the number that determines capital gains tax when the property is sold — and for most heirs it eliminates decades of pre-death appreciation from the taxable calculation entirely.

Pennsylvania does not impose a separate capital gains tax. Capital gains are taxed as ordinary income under the Pennsylvania Personal Income Tax at a flat 3.07 percent rate. The stepped-up basis applies to the Pennsylvania calculation on the same terms as federal. A property worth $450,000 at the date of death that sells for $460,000 produces a $10,000 taxable gain — not a gain based on what the decedent paid decades ago. Pennsylvania inheritance tax and capital gains tax are separate calculations. The inheritance tax is paid on the value at death. The capital gains tax is paid on appreciation after death.

Get an appraisal at the date of death to document the stepped-up basis. Without documentation the IRS can challenge the basis claimed on the sale. The cost of the appraisal is almost always justified by the tax savings it protects. For a full discussion of the process for selling inherited property see our page on selling inherited real estate in Pennsylvania.

How Valuation Discounts Affect the Stepped-Up Basis

Valuation discounts that reduce estate tax value also reduce the stepped-up basis — because the stepped-up basis equals whatever value was used for estate tax purposes. A lower estate tax value saves estate tax at 40 percent but creates a lower basis that produces more capital gains tax when the heir sells.

A 50 percent interest in a property worth $5 million has an undiscounted value of $2.5 million. Lack-of-control and lack-of-marketability discounts of 32 percent reduce the estate tax value to $1.7 million. The estate saves tax on $800,000 of discounted value at 40 percent — $320,000 in estate tax savings. But the heir’s stepped-up basis is $1.7 million, not $2.5 million. When the heir sells at full value, the $800,000 gap between the basis and the sale price is taxable gain. At a 23.8 percent federal capital gains rate that is $190,400 in additional tax. The net benefit of the discount strategy is $129,600 — real, but significantly less than the gross estate tax savings suggest.

The analysis changes depending on whether the heir plans to sell. An heir who holds the interest indefinitely never pays the capital gains cost. The estate tax savings are permanent and the basis gap never matters. An heir who sells shortly after inheriting pays for part of the estate tax savings through capital gains. For business interests and real estate held in entities, the decision to apply valuation discounts requires modeling both the estate tax savings and the capital gains cost to the heir. For a detailed discussion of how minority discounts are calculated in Pennsylvania entity interests, see our page on fair market value vs. fair value in Pennsylvania LLC buyouts.

---

Real estate inheritance tax issues are not just about the rate — they affect whether property can be sold, financed, or transferred without delay.

Pennsylvania inheritance tax is imposed under the Tax Reform Code and administered by the Pennsylvania Department of Revenue. Applicable rates, exemptions, and filing deadlines are established by Pennsylvania statutes under Title 72.