Guidelines for Selling Inherited Property and Calculating Tax Liability
When you inherit a house, you may wonder what your tax liability will be upon selling it. This article provides a comprehensive guide on how to approach this process, including calculations for tax liability and the role of fair market value.
Understanding Your Tax Liability
Eligible Deduction
For homeowners who have lived in their homes for at least two of the last five years, you may be able to exclude up to $250,000 (or $500,000 if married and filing jointly) from capital gains tax. This exclusion allows you to shield a significant portion of your profit from taxes. If you are eligible, the exclusion amount is in addition to any prior primary residence exclusions you may have claimed.
Eligibility for Inherited Property
For inherited property, the initial basis is typically the fair market value of the house at the time of the decedent's death. However, if you lived in the house for at least two of the last five years, you may be able to use a more favorable alternative basis, which could be your cost basis or the alternative basis election, depending on what is more beneficial. This can significantly reduce your tax liability.
Calculating Fair Market Value
The fair market value of the house at the time of inheritance is crucial for determining your basis and potential tax liability. The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.
Role of Real Estate Appraiser
To accurately determine the fair market value, a professional real estate appraiser can be employed. This appraiser will conduct a thorough evaluation of the property, considering factors such as location, size, condition, and recent sales of similar properties. The appraiser can provide a written estimate, which can cost several hundred dollars.
Calculating Capital Gains
When you sell the house, the capital gains will be calculated by subtracting the fair market value at the time of inheritance (or the alternative basis if applicable) from the selling price. If the fair market value at the time of inheritance is lower than the value at which you sold the property, you may have a capital gain to report.
Additional Deductions
To further reduce your tax liability, keep in mind that you can claim the $250,000 (or $500,000 for married couples) exclusion on the profits you make between the time you inherited the property and the time you sell it. This is known as the exclusion for profits on the sale of a principal residence.
Conclusion
Selling an inherited property can be a complex process, especially when it comes to understanding your tax liability. By carefully calculating the fair market value, determining the basis, and utilizing available exclusions, you can ensure that you are prepared for any tax implications. Consulting with a tax professional or a real estate appraiser can provide valuable guidance in this process.