When you sell your home and make a profit, you are required to pay a capital gains tax. But is this true when you sell a home you inherited from a relative that has passed away? You might be excited about inheriting property but when it comes down to it, dealing with taxes and selling the property can be both emotionally and financially draining.
How much you will have to pay when you sell your inherited property can have a major impact on what you are hoping to profit and may deter you from selling it. Before we go through the details, we want to talk about capital gains tax and what it is.
Do You Pay Capital Gains Tax When You Inherit A Property?
Generally, when you sell your home for more than what you purchased it for, you are required to pay a capital gains tax. This can vary anywhere from 0-20% depending on your annual income. Capital gain on your home sale can be determined by subtracting the initial purchase price from your home’s current market value. You might be eligible for an exclusion of up to $250,000, if single, or $500,000 married, if you have occupied the home for two of the last five years. This exclusion has benefited many homeowners.
How Much Tax Are You Required To Pay When You Sell Property You Inherited?
When you inherit a home and sell it, you will pay a capital gains tax based on what the value of the home was when the owner died. This is referred to as the ‘stepped-up’ basis for paying taxes on inherited property.
Let’s say you inherit your grandparent’s home, and it was valued at $150,000 at the time of their death. You were able to sell it for $180,000 a few years later. To determine how your profits will be taxed, you will subtract the ‘stepped’ up basis of the home (150,000) from the sales price (180,000) to determine the taxable gain. In this case, the amount you would have to pay tax on is $30,000.
Unfortunately, when you inherit property, you are not eligible for any capital gains tax exclusions. However, if you sell the home for less than what the ‘stepped-up’ basis value is, you can deduct the amount you lost up to $3,000 annually– anything more than that can be rolled into the next year as a deduction. Further tax exemption exists if you sell the property to another relative.
How Do Improvements Made To The Property Impact Your Tax Bill?
If you inherit an older home, you might make some renovations prior to selling it. Any updates to the home can be used to reduce your tax bill which can help you increase your profit. If you have the time, remodeling the space will give you a better return on investment.
So, keep those receipts handy! You will be able to subtract any of your remodeling expenses from the capital gains tax owed when you finalize the sale of the home.
Tom Reese has 20+ years experience in helping his clients sell their homes for a price that sells and makes them a profit. Tom has helped his clients buy and sell property in every neighborhood in Northern Kentucky and Cincinnati.
About Tom Reese
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