Full question:
Are there taxes due on the sale of an inherited home?
- Category: Wills and Estates
- Date:
- State: California
Answer:
Inherited property can have various tax implications. If you sell the home for the estate's valued amount, you may not owe taxes. However, if the property has appreciated in value, you could face capital gains tax unless you used it as your primary residence. For investment properties, a 1031 exchange might be an option.
When selling inherited property, it's crucial to determine if you have realized a taxable gain. This depends on the concept of "basis," which is the amount used to measure gain or loss against the selling price. Unlike property you purchased, inherited property has a different basis calculation.
The general rule is that the basis for inherited property is stepped up (or down) to the asset's fair market value at the decedent's date of death. For example, if a decedent bought stock for $500 and it was worth $1 million at their death, the recipient's basis becomes $1 million. Therefore, if they sell the stock later, they will only pay taxes on any gains beyond that value.
In contrast, if you receive a property as a gift, the basis is typically the same as the donor's, known as a "carryover" basis. If the donor bought stock for $500 and gave it to you when it was worth $1 million, your basis remains $500. If you sell it for $1 million, you would owe taxes on the gain of $999,500.
In cases where the asset has depreciated, the basis might be the fair market value at the time of the gift. If the stock was worth $250 when gifted and sold for $150 later, your basis for loss would be $250, resulting in a $100 loss.
In unique situations where the selling price is higher than the gift value but lower than the donor's basis, you would not have a gain or loss. For example, if the stock's value was $300 at the time of the gift and you sold it for $400, you would have neither a gain nor a loss based on the applicable basis calculations.
If the donor paid federal gift tax on the transfer, you might increase your carryover basis by the portion of the gift tax attributable to the asset's appreciation.
Given these complexities, it is advisable to consult with an accountant or estate attorney for guidance on inherited property.
This content is for informational purposes only and is not legal advice. Legal statutes mentioned reflect the law at the time the content was written and may no longer be current. Always verify the latest version of the law before relying on it.