When someone dies, you can inherit an assortment of items, ranging from plain old cash to real estate to stocks to old keepsakes whose sentimental value far exceeds the fair market value. Depending on where you live and when you sell the inherited assets, you might have to share some of the value with either the Internal Revenue Service or a state government.
No Federal Taxes
You can breath a sigh of relief because there's no federal inheritance tax that will charge you just because you received a bequest from someone who died. There is a federal estate tax, but that tax is charged to the estate of the person who died, so as long as the estate paid, once you receive the property you don't pay any taxes on it. In addition, most estates won't owe any federal income tax because the exemption, as of 2014, allows the first $5.34 million to pass tax-free.
State Inheritance Taxes
Some states, including Iowa, Nebraska, Kentucky, Tennessee, Pennsylvania, Maryland and New Jersey impose inheritance taxes on people who receive assets from decedents who died in that state. For example, Pennsylvania's inheritance tax hits you at a different rate depending on your relationship to the decedent. If you're a surviving spouse, you won't owe any inheritance tax, but if you're a sibling of the decedent, it jumps to 12 percent. If you were just a good friend but not related, it's 15 percent.
Selling Inherited Property
It's important to keep good records of the value of the inherited property because when you sell it, you pay taxes only on the increase in the value since the decedent's death. The federal tax code sets your basis for the inherited property as the value when the decedent died. For example, say your mother bought a diamond ring for $100 decades ago and at her death it was worth $1,500. If you sell it for $1,700, you pay taxes on $200.
When you sell inherited capital assets, like real estate, a car or furniture, any gains you have are treated as long-term capital gains for tax purposes no matter how long you or the decedent owned the property. Typically, you must hold property for more than a year to qualify for the lower long-term capital gains rates, which max out at 20 percent as of 2013 compared with 39.6 percent for regular tax rates, but there's a special exception for inherited property.
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