Tax Consequences of Inheriting a House From a Deceased Parent

Inheriting a home doesn't always come with tax consequences.

Inheriting a home doesn't always come with tax consequences.

Losing a parent is never easy, and dealing with the tax issues of inheriting your parent's home just adds to the stressful time. Though your parent's home being included in the estate and passed on to you might have estate, inheritance and eventually income tax consequences, not all of those taxes will fall on you.

Estate Taxes

If your parent owns a home at the time of death, it could increase the amount of estate taxes owed by your parent's estate. However, estate taxes only kick in if the amount of taxable gifts during life and the decedent's estate exceeds the estate tax exemption, which is $5,340,000 as of 2014, but different states may have lower exemption thresholds. Plus, unless the estate doesn't pay the estate tax bill to the IRS, you won't be on the hook for paying just because you inherited the home.

Inheritance Taxes

Though they sound similar, inheritance taxes are different from estate taxes because the inheritance tax is charged to whoever receives the property. So if you live in one of the states that charges an inheritance tax, you will be liable for paying the state government. According to Forbes, as of 2013, Nebraska, Iowa, Kentucky, Tennessee, Maryland, Pennsylvania and New Jersey imposed inheritance taxes. If you can't pay the tax, you may have to sell the home to raise the cash to do so.

Selling the Home

If you sell the home immediately after your parent's death, you'll likely owe little or no tax because of the basis step-up the home received when your parent died. Typically, you pay taxes on the amount of gain over the price paid, also known as your basis, to acquire the home when you sell it. However, there's a special exception for property you inherit: Your basis is the fair market value at the date of your parent's death. For example, say your parent bought the house for $100,000, and it was worth $350,000 when your parent died. If you sell it for $360,000, you only pay income taxes on $10,000.

Income Tax Rates

The home counts as a capital asset, which means any gains are taxed as capital gains. Typically, you must hold an asset for more than one year to get the lower long-term capital gains rates. However, when you sell inherited property, including a home from your parent, any gains are always taxed at the lower long-term capital gains rates no matter how long you or your parent owned the home. For example, if your parent owned the home for six months before dying, then you sold it three months later, any gains are still taxed at the lower long-term capital gains rate.

 

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