How To Sell An Inherited House, Understanding The Taxes Involved
When you inherit a house, the tax implications can seem confusing. Most people don’t know what to do next. But before you try to sell a house you’ve inherited, make sure you have the answers to your most important tax questions.
1. Does the Home Sale Tax Exclusion Apply to Inherited Property?
Ordinarily, when you sell your home, the tax law gives you an exclusion of $250,000 (or $500,000 for married couples filing jointly). That means you don’t have to pay taxes on the first $250,000 (or $500,000) of profit you gain from the sale of the house.
However, when you sell inherited property, you don’t qualify for that tax exclusion. In order to qualify, you would have to live in the home for at least two years, using it as your primary residence.
So the short answer is no, you won’t qualify for the $250,000/$500,000 home sale tax exclusion.
Now for the good news. You will benefit from the “stepped-up basis” rules for inherited property. That means you probably won’t need the exclusion anyway.
2. What Are the Stepped-Up Basis Rules for Inherited Property?
Under ordinary circumstances, the “basis” of a property is its cost or purchase price. But in the case of inherited property, the “stepped-up basis” is the fair market value at the time of the owner’s death.
That’s usually a higher number, which can work in your favor. When you sell the property, your taxable gain or loss will be determined by whether the sale price is higher or lower than the stepped-up basis.
For example, if you inherit a house that has an appraised value of $200,000, and you sell it for more than that amount, you will have a taxable gain. If you sell it for less than that amount, you will have a loss
3. If I Sell an Inherited Home, Can I Deduct a Capital Loss from My Taxes?
If you inherit a house and sell it for less than its fair market value, you are allowed to deduct the loss from your taxes. That can significantly reduce your tax burden.
However, only $3,000 of losses may be deducted against your income per year. Any additional losses must be carried over to future years.
Keep in mind that if you live in the house before you sell it, it becomes your personal residence, and different tax laws apply.
4. What’s the Fastest Way to Sell an Inherited House?
Selling a house that you’ve inherited can be a quite a headache. It takes a lengthy time commitment to go through everything in the home, make repairs, hire a realtor, coordinate showings, and negotiate offers.
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