A house you inherit through a living trust could carry lots of tax liability, or the tax liability can be minimal. A lot depends on how you use the house and how long you keep it. In addition, the trust that leaves it to you could also have tax liability if the house is part of a relatively large estate.
You don't have to pay federal estate taxes when you inherit a house or other property, but the estate that gives it to you might have to pay taxes if the house is in a revocable living trust. The federal estate tax rate at the time of publication is 40 percent and is levied on the fair market value of the property. If the house you inherit is worth $200,000, it would be subject to $80,000 in tax. However, before calculating this tax, the estate gets to subtract an exclusion. For 2014, the first $5.34 million in property in the estate passes tax free. As such, it's likely that the house you inherit wouldn't be subject to any estate tax.
When you inherit a house, the tax liability for it, if any, is calculated relative to its basis. When someone dies, the value of his property is increased to what it's worth on the date of his death. For instance, if he bought a house for $30,000 but it would sell for $125,000, you would inherit the house as if you paid $125,000 for it. Typically, you need to get an appraisal from a professional appraiser to establish the value.
Living in It
Once you inherit the house, if you choose to live in it, it's treated just like a house you bought. If you treat it as your primary residence for at least two years, the profit you make from selling it after that is tax free up to $250,000 if you are single or $500,000 if you are married. For instance, if your parents paid $50,000 for your house and left it to you when they died, you would inherit it at its market value. If it was worth $200,000 and you lived in it for five years, then sold it for $275,000, you would owe no tax, as your $75,000 in profit is less than the $250,000 or $500,000 exclusion.
Selling It Quickly
If you don't want to live in the house for at least two years and make it your main residence, you can sell it, but you'll have to pay tax on your profit. The tax is calculated on the difference between the basis at which you inherited the property and your selling price after commissions. If you inherited the house at a stepped-up basis of $200,000, sell it for $220,000 and pay $13,200 in commissions on that price, your taxable profit will be just $6,800. That gets taxed as a capital gain. For 2014, capital gains are taxed at your regular income tax rate unless you hold the home for at least one year. After one year, the gains are taxed at 0, 15 or 20 percent, depending on how much money you make overall. You may also be subject to an additional 3.8 percent surcharge if you have a high income.
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