A third of people who get an inheritance spend it quickly, and unwisely. But that’s not you – you’re ready to use your inheritance to its full advantage, including selling your inherited home.
Still, that process can come with many questions. One of the top ones is “If I sell inherited property, is it taxable?” Taxes are never a simple subject in America, and taxes in inherited homes are no exception. We’re here to help clear things up.
In this guide, we’ll give you the information you need to navigate the sale of inherited property. If you’re planning to turn your inherited property into valuable funds for your needs, keep reading.
If I Sell Inherited Property is it Taxable?
Let’s start with the basics. Is the sale of inherited property taxable? The answer is sometimes.
In short, it depends on whether the sale counts as a “gain” or a “loss.” If you had a gain or made money on the sale, then you’ll have to pay taxes on that profit amount. But if you can show that you lost money on the sale, you’ll actually get a tax deduction instead.
However, if you’re worried about paying estate tax before you sell, you’ll be glad to know that that’s not something you need to be concerned about. The estate tax gets paid before the property is distributed to you, so it’s not your responsibility.
And chances are good that the estate tax didn’t apply anyway. Only properties valued at over a million dollars (the exact amount depends on the year) are subject to estate taxes.
Taxes that Apply to Inherited Property
Now that you can see the big picture, let’s take a closer look at exactly which taxes apply to inherited properties.
Capital Gains and Losses
As mentioned above, you’ll often get taxed if you made money on the sale, and get deductions if you lost money.
The capital gains and loss tax rules apply to anything you sell to make money, including stocks, cars, and real estate. When it’s inherited property, the tax rules apply in certain specific ways.
If you want the lowest tax rates, you’ll generally need to keep the property for at least a year. But things change if you are living in the home before the sale because then it becomes personal property. If you sell personal property, any losses won’t count as deductions on your tax return. This is something to think about before you move into an inherited home.
To see what your loss or gains were, you’ll use what’s called the “basis” of the inherited home. But since you didn’t buy the home at a set value, determining the basis is a little different when it comes to inherited property.
Determining the Basis
The “basis” for a home’s value typically is the sum of the amount you paid to buy the home, plus the cost of any repairs or improvements that were done since then. However, inherited homes have a “step up” basis since the person who inherited it didn’t pay for it.
The stepped-up basis for inherited homes is the appraised current value of the home. This number is used to find out if you have gains or losses on the sale of the home.
If you have losses over a certain amount, you won’t be able to deduct the whole amount in a given year. However, you can deduct the maximum possible amount every year until you’ve completed all the loss deductions.
Keep in mind that the IRS will be paying close attention to possible fraud situations. If you sell the home to someone else in your family at a loss, they will check out the situation more carefully, since this is a common way to commit tax fraud.
This means you can’t “give” the house to a family member for less than it’s worth in order to claim a loss and avoid paying a gains tax. Although there’s no rule that says you can’t gift inherited property to someone, you can’t do so without paying the proper taxes on it.
Tax Exclusions for Selling Inherited Property
Even though gifting the home isn’t a good way to dodge the taxes, there are some legal tax exclusions that you might find helpful.
Home Sale Tax Exclusion
The home sale tax exclusion is one of the more generous tax exclusion rules. This exclusion lets you avoid paying taxes on the gains from a home sale up to $250,000, or $500,000 if two people file jointly.
This means that unless you had massive gains on your home’s sale, you probably won’t have to pay taxes on the amount. However, the caveat is that you have to have lived in the home as your primary residence for at least two out of the five years before you sell it.
This means that inherited homes don’t qualify for the exclusion until you’ve lived in them for some time.
However, the good news is that the basis for your inherited home is its current value. It’s not likely that you’ll sell it for much more than that (unless you wait a few years), so you don’t need the home sale tax exclusion anyway.
Improvement Deductions
You might decide to wait and make some improvements to the home before you sell it. This is another good way to get tax advantages.
The money you invest in making these improvements gets deducted from the total capital gains amount, reducing the taxable amount. This means that paying for home repairs is actually a good way to make more money in the long run.
How to Sell Inherited Property
Now that you know the answer to “If I sell inherited property is it taxable?”, you’re ready to move forward with the sale.
With these notes in mind, selling an inherited property is essentially the same as selling any home. The process can be challenging, depending on where you live and how much time you have.
Need help selling your inherited home? We’re here for you — learn more about what we buy here.