When you inherit a home after the passing away of a loved one, dealing with the entire process of absorbing the estate is no easy one. After all, you’re still dealing with the emotions of having just lost your loved one, and the business side of things is the last thing that you want to have on your mind.
But when you’ve taken some time to process the passing and you’re ready to move on to look at the estate, it’s very important to know the tax implications of inheriting a house. You don’t want to end up on the wrong side of the IRS here, because whenever you’re inheriting a home you’ll be dealing with large sums of money, which could make you subject to large penalties if you end up doing the process wrong.
In this article, we’ll tell you how to navigate the complicated process of inheriting a home while staying on the right side of property and tax law.
Fair Market Value
The first thing to consider is whether or not you have an estate attorney. An estate attorney will be able to help you through this process for a small percentage of the estate or a flat fee.
The first thing the attorney will do (or you can do yourself if you don’t have an attorney) is get the house appraised at the time of your loved one’s passing. This appraisal is called the fair market value and must correspond to the time of the original owner’s passing.
This is the value of the home that is later used when calculating tax liability.
Tax implications only come into play when you consider capital gains. Capital gains are profits that you make on an investment that you own. For instance, when you net a profit on the stock market, that net profit is called your capital gain.
Similarly, when you net a profit on the inheritance and sale of a home, that is called a capital gain. Thus, inheritance tax implications only come into play when you sell an inherited house.
Selling an Inherited Home
When you sell an inherited house, the tax liability that you have is only on the capital gain you received from the property. So if the home was valued at $250,000 in the fair market value appraisal process at the time of your loved one’s passing, and you sell it for $300,000 a couple of years later, then you pay taxes only on your capital gain of $50,000.
You don’t pay any tax on the $250,000 value that you inherited. You will, however, be liable for any ongoing yearly property taxes or district taxes for the duration that you own the home. Also, consider that different states may do it differently.
Tax Implications of Inheriting a House
There you have it — now you know the tax implications of inheriting a house. Because you only pay on the capital gain, the truth is that your tax liability will often be minimal in comparison to the addition to your net worth.
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