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Do I need to report taxes when selling inherited property on a contract for deed?

Do I need to report taxes when selling inherited property on a contract for deed?

Full question:

Inherited property. Selling it contract for deed. Under $100,000.00. Don't think there should be any taxes to pay. Does this have to be reported on income tax return?

Category: Contract for Deed
Date: 04/07/2025
State: Illinois

Answer:

The IRS treats contract for deed transactions as sales. This means sellers must report these transactions as installment sales and lose tax benefits tied to the property. Sellers typically give buyers a payment schedule showing the interest paid each month, which buyers can use for their tax returns. Buyers can deduct some of the interest paid on their contract for deed, provided it is recorded and secured by real property. Although not required, sellers may give buyers an IRS Form 1098 to help with tax reporting.

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.

FAQs

Do you pay income tax when you sell inherited property?

When you sell inherited property, you generally do not pay income tax on the sale itself. Instead, the IRS allows you to use the fair market value of the property at the time of the decedent's death as your basis. This means any gain from the sale is typically calculated based on this stepped-up basis, potentially reducing or eliminating capital gains tax. However, if the property is sold for more than its fair market value, you may owe taxes on the profit.

How to avoid capital gains tax on inherited real estate?

To avoid capital gains tax on inherited real estate, you can take advantage of the stepped-up basis rule. This rule allows you to value the property at its fair market value at the time of inheritance, rather than its original purchase price. If you sell the property for this value or less, you typically won't incur capital gains tax. Additionally, holding the property for a longer period may provide further tax benefits.

Do I need to report inheritance money to the IRS?

Generally, you do not need to report inheritance money to the IRS as income. Inherited assets are not considered taxable income. However, if you earn income from the inherited assets, such as rental income from inherited property, you must report that income on your tax return. It's also important to be aware of any estate taxes that may apply to the estate of the deceased.

What is the tax loophole for inherited property?

The primary tax benefit for inherited property is the stepped-up basis, which allows heirs to value the property at its fair market value at the time of the decedent's death. This can significantly reduce or eliminate capital gains taxes upon sale. While not a loophole in the traditional sense, it is a legal provision that can provide substantial tax savings for heirs when they sell inherited real estate.

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