When you sell a home you inherited, you may be left wondering how much of the proceeds you need to put aside for taxes, or if you even need to report the sale at all. Your taxable gains from selling a home you inherited equals your net proceeds minus your basis for the home. You do have to report any gains from the sale of an inherited home, but because of the rules for figuring your basis and holding period, you might not owe as large a tax bill to the Internal Revenue Service as you may have been anticipating.
TL;DR (Too Long; Didn't Read)
If you inherit a home and opt to sell it, you will have to report any gains that occur as a result of the transaction.
Basis for Inherited Home
Typically, when you sell a home, your basis equals what you paid for the home. However, when you inherit property, you didn’t pay anything. Instead, you use the fair market value of the inherited home as of the date of the decedent’s death or, if the alternative valuation date was used for estate tax purposes, the value as of the alternate valuation date. This can generate a substantial tax savings.
For example, say your parents bought the home decades ago for $30,000 and at the time of your parents’ death, it was worth $300,000. If your parents sold the home right before they died, their basis would only be $30,000. But, when you sell the home, you get to use the higher basis of $300,000 when calculating your taxable gains.
If you sell the home very shortly after inheriting it, chances are that the fair market value hasn’t changed substantially between the time the decedent died and the time of the sale. In that case, you should have only a very small, if any, gain or loss to report. But, if you’ve held it for longer, the value could have gone up more dramatically.
Tax Treatment of Gains
Gains from selling real estate are typically classified as short-term capital gains if you hold the property for a year or less or long-term capital gains if you hold the property for more than one year. Long-term capital gains are taxed at lower income tax rates than short-term capital gains, which are taxed at the same income tax rates as ordinary income. However, regardless of how long you own the inherited home before you sell it, the gains are always treated as long-term capital gains because of a special exception in the tax code. Therefore, any gains you do have on the sale of the inherited home will be taxed at the lower long-term capital gains rates.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."