While inheriting a home can be quite a roller coaster ride. On one hand, you are probably sad at the passing of the owner of the home. On the other hand, you might be overwhelmed with getting an extra house and all the stuff that goes along with it: mortgage, taxes, insurance, and upkeep. So you might consider selling and you might be wondering just what are the tax consequences when selling an inherited house. Just what are the tax laws and will they make a bitter-sweet inheritance a huge tax burden?

Tax Consequences When Selling an Inherited House

What is Your Tax Basis In the House?

When you inherit a house, the value of the property at the time of the previous owner’s passing becomes your “basis” for tax purposes. This initial value plays a significant role in determining the taxable gain (or loss) when you eventually sell the house. Two scenarios can occur:

a) Step-Up in Basis: If the house’s value increased before you inherited it, you’ll typically receive a “step-up” in basis. This means your new basis will be the property’s fair market value at the time of inheritance. A higher basis can be advantageous when calculating taxes upon the sale.

b) Step-Down in Basis: Conversely, if the property’s value decreased before inheritance, you may receive a “step-down” in basis. In this case, your basis will be the property’s lower fair market value at the time of inheritance.

Will the Home be a Primary Residence or an Investment Property?

How you use the inherited house can influence the tax consequences of its sale:

a) Primary Residence: If you decide to move into the inherited house and use it as your primary residence, it may qualify for a valuable tax exclusion. This means you could potentially exclude a portion of the home sale’s capital gains from your taxable income if specific ownership and use requirements are met.

b) Investment Property: If you choose not to reside in the inherited house and instead use it as a rental property or for investment purposes, it will be considered an investment property. In this case, you’ll face different tax implications when selling it.

Will You Have Short-Term vs. Long-Term Capital Gains:

The duration you hold the inherited house before selling it can impact the taxes you owe:

a) Short-Term Capital Gains: If you owned the house for one year or less before selling it, any profit from the sale would be classified as a short-term capital gain. Short-term gains are generally taxed at your regular income tax rate, which can be higher than long-term capital gains tax rates.

b) Long-Term Capital Gains: If you owned the house for more than one year before selling it, any profit would be considered a long-term capital gain. Long-term gains often benefit from preferential tax rates, which are generally lower than regular income tax rates.

Just keep in mind that your Capital Gains, short-term or long-term will be affected by your basis. The Price that you work from for a starting point is your basis, not the price your loved one paid for the house when they purchased it.

Tax Exemptions and Exclusions:

Several exemptions and exclusions could reduce or eliminate your tax burden when selling an inherited house:

a) Home Sale Exclusion: If the inherited house became your primary residence, you may qualify for the home sale exclusion. This allows you to exclude a portion of the capital gains from your taxable income, subject to specific criteria.

b) Estate Tax Exemption: Beneficiaries of an inherited house usually don’t have to worry about paying federal estate tax due to the estate tax exemption. The estate tax typically applies to the estate of the deceased, not the recipients.

Seek Professional Guidance

While this overview provides valuable insights into the tax consequences of selling an inherited house, tax laws can be complex and subject to change. While this overview provides valuable insights into the tax consequences of selling an inherited house, tax laws can be complex and subject to change. It’s wise to consult with a tax professional or financial advisor before making significant decisions. They can offer personalized advice based on your specific situation, ensuring you make well-informed choices. Plus we are not accountants or attorneys so it’s wise to consult with a tax professional or financial advisor before making significant decisions. They can offer personalized advice based on your specific situation, ensuring you make well-informed choices.

Having an inherited home can be stressful given the fact that you have new property to take care of and pay taxes for it at the same time… You should go through the probate process if needed as the first step to selling an inherited home. The court will then authorize you to proceed as you wish. If there are any other individuals involved in the inheritance, you should first agree with each other on that decision. You can then file a petition requesting the court to allow you to sell the property.

Ready to Sell The Inherited Home

After inheriting a property, individuals often contemplate various options. Some may choose to move into the house themselves, while others consider using it as a rental property. Another option is to sell the property, and even within this choice, there are further decisions to be made – selling it as is or renovating it before putting it on the market. All of these choices are valid and depend on personal circumstances. If you find yourself considering the renovation and selling route, we’d be delighted to have a conversation with you. Don’t hesitate to reach out. We can assess the property and present you with an as-is cash offer, an estimated sale price with minor improvements, and even a potential value after a complete renovation, particularly if the house or condo is a bit older, as is often the case with inherited properties.