First off, I want to clarify that I am not a lawyer or an accountant. This information is solely based on my experiences dealing with individuals we have assisted who have been in this situation.
Inheriting a property from a loved one can be a tremendously difficult time in your life.
Depending on your specific circumstances receiving this property may offer you personal benefits or can just become a hindrance.
In some instances, folks who have inherited a property will sell of their current residence and move into the inherited property. Usually this will depend on the connection this relative had on the home and if they can stand living in the property that was passed down to the from a deceased love one.
Other's will begin to sell off any valuables in the estate and then sell off the property when the time comes.
There is no telling which option is best for your specific situation, but if you do decide to sell you should understand the the inheritance tax implications when you sell the home.
Tax Consequences For Your Inherited Home
If you decide to go ahead and sell the property that was passed down to you, you should understand how the taxes work when dealing with this situation. You will have to share the information of the sale to Uncle Sam because you will owe income tax on a gain or profit from the sale. However, if you sell for a loss you may also be eligible for an income deduction. This is all going to depend on how you handle the property and when the decedent passed away.
Capital Gains Tax on Gains or Losses
The sale of your inherited home will be treated as a capital gain or a loss for tax purposes. You will have to pay these capital gains taxes if you plan on using this property for investment purposes (such as selling). If you plan on living in the home you will be eligible for the home sale tax exclusion if you end up living in the home for more than 2 years. This means that you will not have to pay any tax on the profit from the property on anything under 250,000 if you are single and anything under 500,000 if you are married. The good thing is that if you plan using this property for investment purposes you will only pay tax on the difference between the sales prices and and the "stepped up basis" at which you inherited the property.
Stepped Up Basis
The properties "stepped up basis" is the full market value of the property at the date of your parents death. This is very beneficial to the new owner because now you will only be paying tax on the difference between the final sales price and the stepped up basis price or full market value. For example supposed you inherit a property that was purchased for 100,000 and it is now currently worth 200,000. You will receive a step up from the original cost basis from 100,000 to 200,000. If you were to sell the property right away for the 200,000 or full market value then you would not have to pay an capital gains tax. However if you ended up selling the property for 250,000 a year later then you would have to pay capital gains tax on the difference (50,000).
Reporting the Sale Proceeds to the IRS
The IRS requires those who sell their property for a gain to report that gain as taxable income. So your first step is going to subtract the amount of you sold the property for from your stepped up basis price. From here you will know the total amount that you are going to be required to file for. You will then report this gain or loss on your schedule D. This is the form used to calculate capital gains or losses. Finally you will have to copy the gain or loss over to your form 1040 tax return.
Even if you do not end up paying capital gains tax on this property it is still a good idea to report the sale to the IRS.
Conclusion
Tax laws by no means is simple, so be sure to contact a local expert attorney or accountant to learn more about the tax inheritance implications when you are willed a property or plan to sell. This can be an incredibly complicated issue that can vary state to state.
Decide on which selling vehicle will be best for you and your family, you have options. You can try and sell your property through a real estate agent, list for sale by owner or sell to a local real estate investment firm. Each option offers its own unique benefits for this specific situation.
If you have an inherited property and have been through this specific situation, let us know how the process went, what complications you had and what option you used to solve your problems.
HS Property Funds
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(315)516-8023