Tax implications of selling an inherited property: the full breakdown.
If you’ve inherited a home or are knee deep in navigating through probate, it can be difficult to grasp the tax implications on the sales proceeds you receive.
Here’s some common questions we’re going to breakdown:
- Will the “home sale tax exclusion” apply to a inherited/probate property?
- What is “stepped-up” basis and how does it impact taxation on an inherited property?
- How do I calculate “capital gains” tax on the sale price of an Inherited property?
- How do I calculate “capital loss” on the sale price of an Inherited property?
- Do I need to pay FEDERAL estate taxes on a probate property?
- Do I need to pay STATE estate taxes on the probate property?
- When do I become responsible for Property Taxes on an inherited property?
- How soon until can I sell this inherited home?
Tax laws can already be fairly confusing and some standard tax calculations change with an inherited house. It’s important to understand those changes so that you can plan for taxes from sale proceeds of an inherited home.
How do I calculate “capital gains” tax on the sale price of an Inherited property?
Capital gains change dramatically with an inherited property because of how Basis is calculated. Here is the standard equation for Capital Gains Tax:
Selling price – Basis = Taxable gain (x applicable tax rate) = amount owed.
The thing that changes for an inherited house is that the “basis” is calculated differently for an inherited property than it is with a property you personally purchased. With Inherited Properties, it’s referred to as a “Step Up” Basis.
What is the “Step-up” basis of an inherited property?
So what’s your “basis?” When you normally buy property the basis is the price you originally paid for the property.
However, when you inherit property you get what’s called a “step-up basis” (IRC §1015) which means that the your basis is the FMV (Fair Market Value) of the property on the date of the decedent’s death, not the original purchase price of the home.
This means that it does not matter what they originally paid for the house! This is great news because that would mean that if your mother purchased a home for $45k in 1978, it’s now worth $250k and you were to sell it tomorrow for $250k… you would pay $0 in capital gains!
So since the basis increased from $45k to $250k upon date of death, we call it “Stepped-Up” Basis Rules. This is HUGE tax savings.
How do I calculate “capital loss” on the sale price of an Inherited property?
It can actually get better… When an inherited house sells for less it’s fair market value, you can claim capital loss for a tax reduction that year.
Here’s how H&R Block describes it:
“You can claim a capital loss on inherited property if you sold it and all of these are true:
- You sold the house in an arm’s length transaction. (meaning buyer and seller have no relationship to one another)
- You sold the house to an unrelated person.
- You and your siblings didn’t use the property for personal purposes.
- You and your siblings didn’t intend to convert the property to personal use before the sale.”
As an example, if you inherited a house worth $100,000 that the deceased purchased for $50,000. You then sold it for $85,000. Well, lucky you: instead of $35,000 in capital gains, you’re actually declaring a $15,000 capital loss! (meaning this sale is going to DECREASE your taxes this year)
The summary to all of this is that the inheritance of a home is almost always treated more favorably than an originally owned home when it comes to taxes.
Do I need to pay FEDERAL estate taxes on a probate property?
Federal Estate Tax is a tax that the government levies on estates when someone passes away. As of 2020, this only applies to estates worth more than $11.58 million, so most estates won’t encounter the federal estate tax and we will not go down the rabbit hole of how that tax is calculated.
If you are inheriting an estate more than $11.58M, it’s best to speak with an Estate Planning Attorney to discuss further as this can be a little more lengthy to explain here.
Do I need to pay STATE estate taxes on a probate property?
Good news: North Carolina and South Carolina are two of 38 states that do not have an Estate Tax. Nothing owed here!
When do I become responsible for Property Taxes on an inherited property?
When someone dies, the tax responsibility of a property immediately passes to the correct beneficiary or heir (even it has not yet been determined) on the date of death. That means that even if a property is still in probate, you become liable for any state and local property taxes associated with the property.
Will the “home sale tax exclusion” apply to a probate/inherited property?
A Home Sale Tax Exclusion is this amazing tax benefit the government offers to encourage people to own their own home. The way it works is that the government chooses to not tax you on the first $250,000 of profit from your home if you’re single (and $500,000 if you’re married).
You must own the home for at least 2 years AND live in the home during that time to qualify.
The big question here is: what about for an inherited property? Do I get the Home Sale Tax Exclusion to a property I’ve inherited?
Unfortunately, the answer is “No.”
However, recall that you DO get the “step-up” basis which recalculates the basis of your home to the FMV of the home. Again, this is a HUGE tax benefit and a great aspect of Inherited Properties, but unfortunately, there is no “Home Sale Tax Exclusion.”
How long do I have to wait to sell a property that's in probate?
Unfortunately, this topic requires a much longer format to fully answer the question.
Thankfully, we created that larger format to fully answer this question in our Probate Guide titled, “Guide to Probate & Inherited Properties”
For now, it’s important to note that we can make you an offer on the house today and work through the entire process with you.
We understand how Probate works and once we understand your family’s needs, we’re confident that we’ll give you a higher offer than any of our competitors. Before you give us or someone else a call about your needs, read through the free guide below to understand how probate works and how to sell an Inherited Property.
Why Sell Your Home to Us.
Your situation isn’t an easy one. There’s a lot you’re going through and it’s frankly the worst time to have to figure what to do with a loved one’s belongings, let alone how to navigate a new legal process. We’d be honored to help you along this process.
There’s plenty of investors that are going to buy the property off your hands quickly, but it’ll come at the price of low property value. We’re different.
We’re confident that we can offer you a higher price for your home than any of our competitors and allow you to put the probate process behind you.
Beyond offering you more than our competitors, we also truly want to help make the process easy during this time.
Leave us a mess to clean up, leave us boxes of receipts, closets full of sweaters or bedrooms that you’d rather not go into. Whatever we can do to make this process easy, we’re going to do it.
We can purchase a home with existing liens, a large mortgage, huge repairs and title issues.
We can purchase a home that’s in GREAT condition and we can take on a home that is uninhabitable and wrought with an infestation.
We’re creative, and we’re committed to giving your an offer that puts the most amount of money in your pocket. Call us at (704) 859-8675 or fill out the form below and let us find out how we can work with you (and your co-heirs) to get the property taken care of.
The Residential Buyer is not a law firm, an attorney, brokers or real estate agent. The Residential Buyer is a real estate investment company. We do not sell any services or sell a product. The Residential Buyer purchases homes.