Tax Implications of Selling Inherited Property

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Note that the tax basis of the home, which determines the gain and loss and therefore the tax ramifications you will face, is the value of the home at the date of death of the person devising the property. Any appreciation between the date of death and the sale will be taxed as long-term capital gain that has varying values depending on the size of the estate.

Example: Dad and Mom purchased a home in 1963 for $30,000. They made no improvements since they bought the home. When the survivor died in 2010, the home was worth $975,000. The value was determined by a fee appraiser. The real home is sold in 2011 for $1,050,000. with selling costs of $50,000. The tax consequences are as follows:

Selling Price:

$1,050,000.

(Less) Closing Costs:

$50,000.

Equals:

$1,000,000.

Basis (Tax Cost):

$975,000.*

Capital Gain:

$25,000.

Tax:

$8,350.

* Check with your tax advisor as there have been recent changes in Federal Law (President Obama's Tax Act - December 2010).

Some people think that giving the home to their children while they are alive is a good way to avoid probate. That is not the case! Disastrous tax implications will arise in this scenario because the tax basis for the gift equals the purchase price of the home. The tax consequences are as follows:

Selling Price:

$1,050,000.

(Less) Closing Costs:

$50,000.

Equals:

$1,000,000.

(Less) Original Basis:

$30,000.

Capital Gain:

$970,000.

Tax:

$325,000.

These unfavorable tax results and probate can be avoided by having the home transferred into a revocable living trust (see Estate Planning).

One of the advantages of preparing the house for sale is that you can subtract the cost of preparing the house for sale, as well as other costs of the sale, from the proceeds. If a loss is realized, it is deductible. This means that a beneficiary can divide any gains or losses on the sale of the property and report them on their personal income returns.

Additional Resources

Hanley Law

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