Knowing Capital Gain Taxes On INHERITED PROPERTIES
At ProbateResource.com, we are a real estate and probate solutions company. We aim to be a one-stop shop to help you with all aspects of the probate process, including property sales.
Today, let’s discuss the most commonly asked question we receive –TAXES.
Firstly, I want to clarify that I am not a tax professional, nor do I claim to be one. Therefore, I highly recommend that you consult with a certified public accountant (CPA) who can analyze your specific tax situation and offer recommendations on how to file your taxes regarding inherited properties.
Right now, let’s focus on CAPITAL GAIN TAXES.
To begin with, it’s important to determine whether the property was an investment property or a personal property. This distinction is crucial because they are taxed differently, and this will impact the outcome.
Step-up In Basis
Another concept you need to understand is the step-up in basis. What does basis mean? Well, basis refers to what you have invested in the property. For instance, let’s assume you purchased a rental property today for $100,000 and spent $50,000 renovating it. You then rented out the property for five years before deciding to sell it for $250,000.
Your initial investment in the property was $150,000, which includes the $100,000 purchase price and $50,000 in rehabilitation costs. If you were to sell the property for $250,000 five years from now, your potential capital gain would be $100,000. However, there will be some sale expenses, such as real estate commissions, transfer taxes, and property taxes, that you will need to consider. Additionally, you may have incurred other capital expenditures over the years, such as replacing the roof, which could reduce your capital gain. This is just a simple example, but it gives you an idea of what your capital gain might be.
Now, let me explain something called “step up in basis.” When you inherit a property, the basis of the property automatically adjusts to the market value of the property on the day of the previous owner’s death.
When someone passes away, the clock starts ticking from the day of their death. For instance, let’s say your parents bought a rental property 15 years ago for $150,000, and they rented it out for 15 years, meaning their basis was $150,000.
If your parents passed away recently and you and your siblings inherited this property, and now you want to sell it, the basis of the property steps up to the value as of the date of your parent’s death. Suppose the property was worth $300,000 as of two weeks ago when your parents passed away. In that case, the basis of that property steps up to $300,000, which happened to be the property value as of the date of your parent’s death. I hope this example clears up any confusion.
Please note the following information: if a property is inherited and the value of the property at the time of inheritance was $300,000 or less, and later sold for the same amount, there would be no capital gain on the transaction. This is because the stepped-up basis (the value of the property at the time of inheritance) and the amount the property was sold for are the same. However, this is a simplified explanation, and it is best to consult with a tax professional for a more accurate analysis.
Estate Tax Exemption Laws
Additionally, there are estate tax exemption laws that exempt a certain portion of estates from being taxed up to a certain dollar amount. As of 2023, the estate tax exemption amount is over $12 million.
It may be beneficial to consult with a CPA regarding step-up and basis. In many cases, you may not be required to pay inheritance or capital gains taxes on an estate. However, it’s important to inform the accountant whether the property in question was a rental or personal property, as there are some exemptions that may apply. If, for example, only one parent survived and they were both joint tenants with survivorship, there may be some additional details to consider. To obtain the most accurate answer, it’s recommended that you seek the advice of a tax professional who can evaluate your specific situation.
I hope this information has been helpful to you. As I mentioned earlier in the video, tax-related questions are the most commonly asked questions. However, I would highly recommend consulting with a certified public accountant (CPA) for more in-depth information as every tax situation is unique to each individual or family.
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If you are looking to sell a property, Probate Resource can help you out.
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If you prefer the conventional method of selling your property and wish to list it on the market with the assistance of a real estate agent, we can help you. We have an extensive network of real estate agents all across the country who specialize in probate and inheritance. To avail our services, please visit probateresource.com and fill out the form or call us directly. We are always ready to assist you