Elder Law Answers
How Do We Calculate the Taxes on Property We Inherited from Our Mother?
Before she died, our mother put her house in the name of her six children. No money was transferred. After she died, the chil...
Read moreDo You Pay Capital Gains Taxes on Property You Inherit?
- October 28th, 2020
When you inherit property, such as a house or stocks, the property is usually worth more than it was when the original owner purchased it. If you were to sell, there could be huge capital gains taxes, which could cost you thousands of dollars.
Avoiding Capital Gains Tax
Fortunately, when you inherit real estate, the property's tax basis is "stepped up," which means the value is re-adjusted to its current market value and often reduces or entirely eliminates the capital gains tax owed by the beneficiary.
For example, Sally's parents purchased a house years ago for $100,000 and bequeathed the property to Sally when they pass away. When Sally inherits the property, it's now worth $200,000. Below are a few scenarios for how much profit from the sale of the house would be subject to capital gains taxes:
Sally Sells the Property Immediately
Sally receives a step-up from the original cost basis from $100,000 to $200,000 (the value at the time of her parent's death). If she sells the property right away, she will not owe any capital gains taxes.
Sally Holds the Property and Sells When the Property Appreciates
After a few years, the real estate is worth $400,000. If Sally sells now, the difference between the stepped-up basis of $200,000 and the current value of $400,000 is subject to capital gains. In this case, Sally will pay capital gains tax on $200,000.
Sally Lives in the House and Sells When the House Appreciates
If Sally lives in the house for at least two years before selling, Sally can exclude up to $250,000 ($500,000 for a couple) of her capital gains from taxes. If the property sells for $400,000, she would be able to exclude the $200,000 in appreciation (the difference between the sale value and the stepped-up basis) that would otherwise be subject to capital gains.
On the other hand, if Sally's parents had gifted the same property to her before their deaths, as opposed to bequeathing it to her, the tax basis of $100,000 would not be stepped-up. If Sally sold the house, she would have to pay capital gains taxes on the difference between $100,000 and the price when she sold it.
Sally Disclaims the House to Avoid Taxes
Sally chooses not to inherit the real estate and ensures that she won't pay taxes on the property next year. The house will then go to the next beneficiary in line.
Capital Gains Taxes in a Nutshell
Take care not to underestimate the impact of capital gain tax on inherited property. The capital gains tax rate will depend on the length of time that you hold the property; long-term rates apply if you hold the property for more than one year.
With proper planning you can avoid paying high capital gains taxes on assets you inherit. If you have inherited property or anticipate that you will, the advice of an estate professional is invaluable. Contact an estate planning attorney in your area to learn more about how capital gains taxes can affect you.
Last Modified: 10/28/2020