The Internal Revenue Service states that you must report the sale of a home unless it was your primary residence and you did not realize any gain over the $250,000 exclusion for single and head of household filers or the $500,000 exclusion amount for married filers. In most cases, the sale of an inherited home is a reportable event, even if you do not have to pay taxes on the sale. This can be a complicated matter, and you must report completely accurate information to avoid tax problems.
Determining Your Basis
The basis of an inherited asset is simply the value of the property at the time of the benefactor's death. This is the starting point for determining any taxable gain or loss on the sale of the property. Your standard basis in an inherited property is the value of the house divided by the number of beneficiaries who were also named as owners of the asset, such as siblings or a surviving spouse.
If the benefactor died in 2010, special rules may apply to the property and the basis may be calculated differently. See IRS Publication 4895, “Tax Treatment of Property Acquired From a Decedent Dying in 2010,” to determine if these rules apply to your situation and, if so, how to figure your basis in the property.
Do I Have To Pay Taxes on the Sale?
If you sell the house within a year of the benefactor's death and do not make any improvements to the property, the IRS allows you to claim the value of the house at the time of the benefactor's death as the basis. Because this is usually the current market value of the home, the house sells at or below the basis and you do not realize any taxable gains. If you sell the house for more than the basis, the IRS will count that income as capital gains and require you to pay taxes on those earnings.
Adjusting the Basis
Before you report the sale on your tax return, you may need to adjust the basis. This ensures that you avoid under- or overpaying any taxes by taking improvements and costs into account. If you made no improvements, and sold the home within a year of receiving it, you do not need to make any adjustments and can report the original basis on your tax return.
Making major repairs, replacing large appliances and adding on to the house increase the value of the home and, consequently, the basis. Likewise, any costs you incurred to make those improvements decrease the basis. Closing costs and other fees you incur during the sale also decrease the basis.
Reporting the Sale
You report the sale of inherited property on Schedule D of Form 1040. You must also provide information about the property on Form 8949, which requires the address of the property, the date you inherited the house, the date of the sale, the sales price and the adjusted or original basis, as applicable.
The IRS considers the sale of inherited real estate long-term capital gains, regardless of how long you owned the property, so you must enter information about the sale in Part II of Schedule D, which starts on Line 8. Use the information you provided on Form 8949 to complete Lines 8 through 21 and enter the resulting figure on Line 13 of Form 1040.
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