All About Taxes
When you inherit a property, there are few types of taxes that you and the heirs may be responsible for paying. Make sure to consult with your tax professional as you discuss next steps and the outcome of the estate.
The two taxes that could likely be a factor are estate taxes and capital gains taxes. Each are a little different, with their own nuances.
Estate taxes are the taxes paid on the wealth somebody leaves behind, and are also called the “death tax”. They are figured at both the federal and state level, and are a bit easier of a concept than capital gains. In essence, if the deceased person has passed on more than a certain amount of money, it will be taxed. If it is below the threshold, then the money will not be taxed for estate taxes. As of 2017, the federal threshold to incur estate taxes was $5.49 million dollars. If the will leaves the heirs more than this amount, federal estate taxes will need to be paid.
On the state level, certain states collect estate taxes, and some states don’t have this type of taxation. Make sure to check with your tax professional on whether this will apply to you. Each state has different requirements, thresholds, tax rates and rules, so make sure you understand your unique case in relation to your state.
As of 2017, the states that still collect the estate tax are:
- District of Columbia
- New Jersey
- New York
- Rhode Island
Capital Gains Tax
Capital gain taxes come when a person sells a capital investment, such as a stock, business or an investment property. There are both short term and long-term classifications and quite a few intricate details.
With inheriting a house, the matter of capital gains is relatively simple. If the heirs decide to sell the property they have inherited, this will entail capital taxes because the IRS sees the property as an investment.
The heirs will pay taxes on the “stepped up value” of the property, figured at the time of death. This stepped up value is the fair market value of the property at the time of death. The heirs will be have capital gains or losses for the difference of what they sell the property for and what the fair market value is at the time of death.
To give a hypothetical example:
- John bought a house for $20,000 and willed the house to his two children
- At the time of his death, the house was worth $100,000
- John’s children took a few months, and finally decided to sell the house
- They sold the property for $105,000
John’s children would be responsible for paying capital gains from the stepped up basis, which is $100,00, to the price they sold the property at. In the eyes of the IRS, they have had $5,000 in capital gains, and will be responsible for paying taxes on this amount.
For some additional light reading on the topic, take a look at some IRS publications about the matter.