Tax Consequences for the Sale of an Inherited Property

You may owe capital gains tax if you sell your inherited property.

You may owe capital gains tax if you sell your inherited property.

You don’t owe any taxes when you first inherit property from an estate or trust. You inherit the property at its fair market value on the day your friend or relative dies. Before you received the property, the estate or trust paid any taxes that might have been owed. Your future tax consequences depend on how long you keep the property and what kind of property you sell. Under Internal Revenue Service regulations, the money you get when you sell your inherited property is a long-term capital gain whether you owned the property for five days or five years.

Timing the Sale

You’ll minimize the tax consequences if you sell your inherited property quickly. When you first receive the property, you don’t have a tax liability unless the property value changes. Selling the property shortly after you receive it keeps your capital gain or loss small. The property doesn’t have enough time to dramatically increase or decrease in value. If there is any tax owed, your tax credits and deductions may be large enough to offset the tax increase.

Selling Investment Property

If you inherited stocks, bonds or mutual funds, the money you get from the sale is passive income. A passive gain or loss is taxed as a capital gain or loss. At the time of publication, your capital gains are taxed at a maximum of 28 percent. For example, if you sell your inherited stock and make $1,000, your maximum tax would be $1,000 multiplied by 28 percent, or $280. If you have a capital loss when you sell one of your investment properties, you can use that amount to offset the tax consequences of a capital gain.

Selling Inherited House

The tax consequences of selling an inherited home depend on how you used the property. If the home was your primary residence, you can exclude part of the gain to reduce your tax liability. At the time of publication, the maximum exclusion amount is $250,000 if you are single and $500,000 if you are married and file a joint tax return. If you used the house as a rental, you can possibly offset some of the capital gains by using the sale proceeds to purchase another rental property. Your tax professional can determine the best way of reducing your tax liability.

Reporting Your Tax Consequence

You calculate your capital gain or loss using IRS Form 8949, "Sales and Other Dispositions of Capital Assets." Under Part II, "Long Term Assets," you list the name, your basis amount and the selling amount for each property. Subtract the selling price from your basis amount to see whether you have a capital gain or loss for each item. To get your net gain or loss, subtract the total gains from the total losses. Enter that amount on IRS Schedule D, "Capital Gains and Losses," and on your Form 1040 personal tax return.


About the Author

Based in St. Petersburg, Fla., Karen Rogers covers the financial markets for several online publications. She received a bachelor's degree in business administration from the University of South Florida.

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