Selling An Inherited House And Tax Implications

A home you inherited could either be a gift or an inconvenience, based on what your personal circumstances are and what your plans are with the house.

Quite often, families would sell the house they were living to make a seamless transition to the house gained out of inheritance (inheritence).

And there are also cases when the inherited home is being sold altogether.

If you're not keen on making the inherited property your new home and are also finding it difficult to rent out the house, selling remains the only choice.

However, selling an inherited house can be quite an emotional phase, especially if the person who left behind the house was close to you.

This is unlike selling investments such as stocks and mutual funds.

During this period when emotions are simmering, the last thing you'd want is putting up with the obstacles there are to selling a house.

In this article, we'll take a look at the tax implications with regard to selling a house.

Tax Implications

The first thing you should look into when contemplating putting the inherited house on the market is the entire process' financial outcome.

This is because you could be predisposed to taxes on any sales proceeds or capital gains (captial gains), or from the property inheritance itself.

Though the laws vary between states, the following information should at least give you a head-start to things.

• Disqualified for House Sale Tax Exclusion

A tax exclusion is usually there for the taking when the property you sell is a place you've stayed in for at least two years out of the five years of having owned the property.

This means a maximum of $250,000 of sales proceeds is tax-free for an individual homeowner, whereas married couples could evade taxes by up to $500,000 on the sales proceeds.

If you want to qualify for the exclusion, you must live in the inherited house for at least a couple of years.

• Benefit from Tax Basis (Stepped-Up)

Inherited properties do not qualify for sales tax exclusion (as aforementioned), but you can still benefit from a stepped-up basis.

Generally, proceeds are computed incorporating purchase price and any property improvements.

With an inherited property, tax basis is the property's fair market value (FMV) when the previous owner dies.

This mitigates adult kids from owing significant taxes on properties, which have dramatically appreciated over several decades.

• Reporting Sale Proceeds

You should be aware of the "how's" and "where's" of reporting sale proceeds.

Individuals selling an inherited property should report the proceeds as taxable gain.

The actual amount that would eventually get taxed would depend on the property's FMV and other improvements utilized for computing the basis.

• A Property Sale Must Always Be Reported

Even if you did not end up paying taxes on the property sale, the entire series of events or the property sale still needs to be reported.

• Estate Tax and Inheritance Tax Aren't the Same

Tax law isn't simple by any means.

Estate and inheritance tax differ from each other.

It's therefore recommended to seek expert advice from an attorney or accountant to ascertain the several nuances there are to the finances associated with a real estate inheritance.

About the author
Linda Trent