Do You Need to Pay Capital Gains Tax on Inherited Property If Sold?

If you inherit the house, capital gains are usually less than if you buy.

If you inherit the house, capital gains are usually less than if you buy.

If you sell your inheritance, capital gains tax is a possibility. It doesn't matter whether the "capital asset" you inherited is a house, stocks or jewelry. When you sell property you bought, your capital gains are roughly the difference between the purchase and sale prices. With an inheritance, the rules are different.

Stepped Up Value

Suppose you inherit a house from your mother that she bought 40 years ago for $100,000: it's prime real estate and now worth $250,000. If your mother had sold it right before she died, she'd have paid tax on $150,000 of capital gains. When you inherit, however, that gain is wiped out. Your basis -- the amount you subtract from your eventual sale price to measure the gain -- is $250,000. If you sell the house for that amount, there's no capital gains and no tax.

Basis

If the deceased had to pay estate tax or state inheritance tax, his executor will have to figure out and report the value of all the deceased's property. You can use those figures as the cost basis of your inheritance. If the estate wasn't subject to tax, a professional appraisal will do the trick for you. The exception is if you or your spouse gave the property to the deceased in the year before he died. In that case, your basis is its value when you gave it to the deceased.

Reporting

Include Form 8949 with your 1040 to report the sale of your inherited property. You report the amount of your capital gains to the IRS on Schedule D. Capital gains tax is normally equal to your regular income-tax rate if you sell an asset within a year of buying it. No matter when you sell an inheritance, however, you treat it as if you held it for more than a year, which gives you a lower rate.

Losses

The flip side of not paying tax on the deceased's gain is that you can't deduct anything for any of the deceased's losses. If your father's stock portfolio dropped from $100,000 to $60,000 right before his death, your basis when you inherit is only $60,000. If your father had sold the stock, he could have written off a $40,000 capital loss on his taxes, but you can't. If the price drops after you inherit, however, and you sell for less than your basis, you can claim a capital loss.

About the Author

Author of two film reference books, "Cyborgs, Santa Claus and Satan" and "The Wizard of Oz Catalog." Published in Air & Space, Backpacker, Newsweek, The Writer, and multiple trade journals (can fax samples if requested, don't have them available digitally)

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