If you inherit property or are likely to do so in the near future, you may be like many taxpayers and have questions about the tax consequences of selling your inherited property. Most taxpayers I advise are concerned that they will realize a significant gain when the property is sold and the resulting tax obligation will be substantial.
Unlike many tax related scenarios there is actually some good news here. Special rules apply to determining the tax owed on the sale of inherited property. The law allows taxpayers to use the property value at the time of the decedent’s death as the starting point in determining the gain or loss when the property is sold. As a result of this special rule, and assuming the property is sold not too long after being inherited, there often is only a small gain and sometimes the sale can actually result in a loss (when you factor in selling expenses such as commissions etc.).
The first step, to ensure the gain or loss is correctly determined, is to obtain a certified appraisal to establish the property’s tax basis. If an estate tax return or probate was required, a certified appraisal will exist as part of that process.
Note: It is generally not acceptable to refer to a real estate agent’s estimation of value or comparable sale prices.
What if the sale results in a loss?
Unless you are living in the home that you inherit the home is treated as investment property. Under the investment property rule your loss would be deductible but subject to a $3,000 ($1,500 if married and filing separately) per year limitation for all capital losses with any unused losses carried forward to a future year. Under certain circumstances, even if you are living in a home that was inherited, you may still be able to deduct a loss on the sale of the home. In order for this to apply the taxpayer typically must move out and attempt to sell or rent the property shortly after receiving the inheritance.
Like any tax rule, those governing taxation when you inherit property may change so it’s best to consult with a professional should you find yourself in this situation. In fact the President’s Fiscal Year 2016 Budget Proposal includes a proposal that would eliminate any step up in basis at the time of death and would require payment of capital gains tax on the increase in the value of the home at the time it is inherited.
If you have any questions about taxes and inherited property, please give me a call.