Taxes on inherited property

6 Replies

I inherited my Mom's home and the deed was passed to me one year ago this month. The home needs a lot, and I have been considering selling.

From what I am reading, I would have to wait until next June of 2015 to be in exempt status to Capital Gains. Am I correct?

@Ronald H.   I split your post into its own thread.

First, when you inherit a property your "basis" for taxes is the value of the property on the date of death.  So, figuring that out is a very important step.  If you didn't do that, work on figuring that out right away.

So, if you were to inherit a house and sell it right away at the same value as on the date of death you wouldn't owe any taxes at all.  That's the beautiful thing about inheriting a property.

If you hang onto it and you sell later, the taxes are based only on the gain in value from the date of death.  Are you living in the house?  If so, and you sell with a gain, the usual section 250 "two of five" years exemption comes into play.  That says if you have lived in a house for two of the five years prior to sale then you can exempt $250K for a single tax payer or $500 for a married couple from capital gains taxes.

But even if you don't live there a year you may have little, if any, taxable gain.  When you sell you will have significant costs.  Typically 6% for commissions, another 2% or so for closing costs and maybe some seller concessions.  Unless the value has increased pretty significantly these costs may eat up any gains, eliminating any tax bill.

If you're not living in it and you're using it as a rental then a 1031 exchange (the thread where you originally posted) may be an option.

A discussion with a knowledgeable account would be in order before making a decision about selling.

Thanks for the reply, Jon

Yeah, I have lived here since my Mother was placed in a Nursing Home December 2010. My name was not on the title until June 2013.

I wonder what they'll want for proof that I lived there. Utility bills, etc.

@Ronald Holloway

Ronald, you may have missed the point that Jon was correctly making: your only capital gain is increase in property value since the time you inherited it in 2010. How much did it increase since then? Probably not too much, besides it will be offset with selling costs such as Relator commissions etc. So you may not even have capital gain taxes. And if you do, there's no need to wait until next year. You will have long-term capital gains even if you sell today.

Mandatory IRS disclaimer: Be advised that any tax advice contained in this communication, is not intended or written to be used and may not be used for the purpose of (i) avoiding any tax-related penalties imposed under Federal law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

My brother and I also inherited a property from my parents. The first thing we did when my dad passed away was to get a cost basis appraisal. We live in the Los Angeles area and the house has increased in value quite a bit since we inherited it in 2010.

We're planning on selling it soon and I've just now started doing some research into 1031 exchanges in hopes that I won't get killed by capital gains taxes. I'm going to schedule a meeting with our CPA (who also happens to own a mortgage company) to figure out the best course of action.

I'm just glad that we only have to pay taxes on the difference between what is was worth when we inherited it and what we sell it for. My parents purchased the house in 1964 for $40k and the house across the street just sold last month for $925k! 

Perhaps @Steven Hamilton II  can provide info on what proof the IRS expects for showing a house has been your primary residence.  If you're truly living there, pay the utilities, have that address on your car registration and drivers license and get your mail there I wouldn't think you will have a problem.  

It shouldn't be too hard to go back and pull comps from shortly before her death and determine a market value.  This is a really important number to you, so I would figure it out ASAP.  Then, knowing your taxable gain (potential sales price, less selling costs, less your costs basis (value on the date of her death)) you can make a better decision about how to proceed.  Unless something dramatic has happened with values in your area in the last year I doubt you have much of a taxable gain.  I've read news stories that values are up 12% here year over year.  Even if you have a gain like that the selling costs will each up a bunch of your gains and you tax bill will be minimal.

Originally posted by @Jon Holdman :
... Are you living in the house? If so, and you sell with a gain, the usual section 250 "two of five" years exemption comes into play. That says if you have lived in a house for two of the five years prior to sale then you can exempt $250K for a single tax payer or $500 for a married couple from capital gains taxes.
...

I believe the correct IRS section would be the Section 121 exclusion that Jon was referring to ...

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