When you sell an home you inherited -- whether from your mom or anyone else -- you might owe capital gains taxes on some of the proceeds. However, chances are the gains will be minimal if you're selling shortly after you inherit it because of the step up in basis for inherited assets, and you'll always qualify for the lower long-term capital gains rates.
Basis of Inherited Assets
Before you can start figuring out your capital gains from selling a house, you need to know what your basis is, because you don't pay taxes on that portion of the sales proceeds. Often your basis equals what you paid for the house. However, you obviously didn't pay anything if you inherited it. Instead, Uncle Sam sets your tax basis for an inherited home at the fair market value as of your mom's death. For example, if your mom bought the home for $100,000 two decades ago and it's now worth $190,000, your basis is $190,000 and that $90,000 increase in value will never be taxed.
Calculating Your Gain
When you sell your mom's home, the amount by which the sales proceeds exceed your basis in the home equals your taxable capital gains. The sales proceeds are the selling price minus any costs that came with selling the home, such as commissions or advertising fees. For example, if you receive $200,000 from the sale of the home and your basis is $190,000, you only have $10,000 of gain.
Capital gains are taxed at different rates depending on whether the Internal Revenue Service classifies the gains as long term or short term. The general rule is that you must hold an asset, such as a home, for more than a year to have the gains count as long-term capital gains. However, the Internal Revenue Code offers a special exception for inherited property: No matter how long you owned the property or how long your mom owned it before she died, the gains are always taxed at the lower long-term rates.
Primary Residence Exclusion
If you used your mom's old home as your main home between the time you inherited it and the time you sold it, you might qualify for a special exclusion that will likely wipe out any taxable gains. The primary residence exclusion allows you to write off up to $250,000 of capital gains-- or $500,000 if married filing jointly -- on the sale of the home if you owned it and used it as your primary residence for at least two years before selling it.
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