Do you pay taxes when you inherit a house? That’s a great question. So, hey guys, this is Brad with georgiaprobateresource.com and arborviewhomebuyers.com. Thanks for checking out this video. We are a real estate solutions company. We buy houses for cash and we can also help you list the house as well. So this is a question that comes up a lot. We see this searched on Google a lot, we see a lot of traffic on articles around this, and it’s a great question.
First of all, I want to preface this conversation with, I am not a CPA, I’m not an accountant. We highly suggest that you consult a CPA about this for tax questions, but we’ve been doing this long enough that we generally know the question, but again, this is not applicable to everyone’s situation. So I’m going to give you some examples of broad situations and then you can consult your CPA about that from there.
So do you pay taxes when you inherit a house? The number one thing that most people need to pay attention to, was this property a investment property or was this property a personal residence? Typically, if the property is a personal residence, there is an item in the tax code called a step-up in basis. There’s been some talks about it over the years, people trying to eliminate the step-up in basis and let me explain how the step-up in basis basically works. Is that let’s say mom and dad owned a house and you’ve inherited this house from mom and dad. Mom and dad bought the house 40 years ago and paid $100,000 for this house 40 years ago, let’s say. Let’s say today the house is worth, I don’t know, 400, $500,000, okay? Probably $500,000. Let’s just use that number, okay? So now all of a sudden, the difference between what mom and dad bought it for and what it’s worth today is pretty significant. It’s $400,000, okay? So if mom and dad paid $100,000 for that house 40 years ago, that is their basis, plus any improvements they might have made to the house over the years. So if they’ve did a $100,000 remodel 10 years ago, right? Their basis is now like $200,000 instead of $100,000.
So your basis is basically what you have in it, is the best way to describe it, right? And you’ll handle that with your accountant. So your basis is here, $200,000, and now the property’s worth $500,000. Well, now we’ve got a $300,000 gap there. So what happens is you have a capital gain of $300,000. Now, if this was mom and dad’s primary residence, typically when you inherit the house, you’re going to get a step-up in basis. And what that means is that the IRS is going to allow you to step up the basis of the house to whatever the value is today. So now, if they value of the house today is $500,000, when you inherit the house, your new basis is $500,000. So if you go to sell that house today for $500,000, you didn’t really have a capital gain because you just stepped up the basis to 500 grand and you sold it for 500 grand, so you didn’t really make any money, so you’re not going to have capital gains on that. But if you stepped up the basis when you inherited the house and then you sold the house three years later for $600,000, well now you have $100,000 gain and you might have capital gains taxes on that $100,000 gain.
So you need to pay attention, read up on step-up on basis, and again, consult your CPA about this. Don’t just read on the internet, don’t take my word for it. But step-up on basis is a huge thing and it benefits a lot of families. Now, there is a sort of a cap on that step-up on basis, and those rules have changed over the years. The best thing to do is go look online. Most estate taxes are exempt up to a few million dollars, so you want to check the exemption amount, and basically, typically you’re exempt from capital gains taxes up to a certain amount. Now, there’s been a lot of uproar in Congress about reducing that amount, the exemption amount and eliminating the step-up in basis, but the reality is that’s a huge benefit to a lot of Americans so I highly doubt that they’re going to adjust that.
So check that out, check the exemption amounts and the step-up in basis, and that’ll tell you how much you actually owe in taxes. Now, there’s a whole different situation here, which involves investment properties, and that can get very complicated, and you should consult a CPA about that because you have depreciation recapture. Whether you are claiming depreciation at all, you need to look into those things. You have long-term capital gains, and then you’ve got just other issues with the tenants and so forth. So make sure you’re paying attention to the assets that the estate owns, and you’re looking at talking about your basis, and figuring out what your basis is, and you can talk to a CPA about that.
So I hope that helps. Thanks again, guys. Again, I’m Brad with arborviewhomebuyers.com and georgiaprobateresource.com. We’re a real estate solutions company. We specialize in probate inheritance, and we’re here to help you with your property, whether you want to sell it quick for cash to us or you’d [inaudible 00:04:54] listed out on the market. I’m a licensed real estate agent with One Source Realty in Georgia, and if you want to go that route, we’d be more than happy to help you with that as well. So thanks again, guys, we appreciate it, and have a nice day.
Do you pay taxes when you inherit a house?
This is Brad and I represent georgiaprobateresource.com and arborviewhomebuyers.com. Our company deals with real estate solutions, meaning we buy houses for cash and help you list your house. We often come across a question that many people search for on Google and read articles about whether we can buy houses for cash and help with listing them. This is a great question and we are happy to answer it.
To begin with, I want to clarify that I am not a CPA or an accountant. It is highly recommended that you seek advice from a CPA for any tax-related queries. However, based on our experience, we can provide you with some general examples of situations. Please note that this may not apply to everyone’s situation, and you should consult your CPA to get tailored advice.
When you inherit a house, you may wonder if you need to pay taxes on it.
First and foremost, it is important to determine whether the property was an investment property or a personal residence.
Step-Up In Basis
If the property was a personal residence, there is a tax code provision called a step-up in basis.
The step-up in basis means that the value of the inherited property is based on its fair market value at the time of inheritance, rather than its original purchase price. This provision is important because it can reduce the amount of capital gains taxes owed if you decide to sell the property in the future.
To explain how the step-up in basis works, let’s say your parents bought a house 40 years ago for $100,000. Today, the house is worth around $500,000. If you inherit the house, your basis (i.e. the starting point for calculating capital gains taxes) is the fair market value of the property at the time of inheritance, which is $500,000. If you sell the property for $500,000 or less, you will not owe any capital gains taxes.
However, if you sell the property for more than $500,000, you will owe capital gains taxes on the difference between the selling price and $500,000. It’s worth noting that if the property was an investment property, the step-up in basis provision does not apply. In this case, the basis for calculating capital gains taxes would be the property’s original purchase price, plus any improvements made to the property over time.
Capital Gains
If you inherit a property and its value has appreciated since the original owner purchased it, you need to determine your basis. Basis is the original cost of the property plus any improvements, minus any depreciation.
If the property is your primary residence and you inherit it, you get a step-up in basis, meaning that the IRS will allow you to increase the basis of the house to its current market value. If you sell the property for its current value, you will not have any capital gains taxes. However, if you sell it for more than the stepped-up basis, you will have to pay capital gains taxes on the difference between the sale price and the stepped-up basis.
It’s important to pay close attention and gain knowledge about step-up in basis. Consulting a CPA is highly recommended to better understand this topic. Don’t solely rely on information found online or take my word for it. Step-up in basis is a beneficial aspect for many families, but there is a cap on how much it can be applied, and the rules related to it have changed throughout the years. It’s advisable to research more about it online.
Estate Taxes
Estate taxes are typically exempt for a few million dollars, so it’s crucial to check the exemption amount. Additionally, you’re usually exempt from capital gains taxes up to a certain amount. There has been discussion in Congress about reducing the exemption amount and eliminating the step-up in basis, however, it’s a significant benefit for many Americans, so it seems unlikely that it will be amended.
Bottomline
Make sure to review the exemption amounts and the step-up in basis to determine your tax liability. Note that investment properties can complicate matters, and it’s best to seek advice from a CPA regarding depreciation recapture, long-term capital gains, and tenant-related issues. Be sure to pay attention to the assets of the estate, calculate your basis, and consult with a CPA for guidance.
Let’s Connect
I hope the information I provided was helpful.
My name is Brad, and I represent arborviewhomebuyers.com and georgiaprobateresource.com. Our company specializes in real estate solutions related to probate inheritance. We can assist you in selling your property quickly for cash or help you list it on the market if you prefer. I am a licensed real estate agent with One Source Realty in Georgia, and we are more than happy to guide you through the process if you choose to list your property.