If you recently lost a loved one or inherited property and need help navigating through it, you’re in the right place. While most inheritance law is consistent across each state, there are some variances.
To learn more about inheritance in Indiana specifically, look below.
Who is Entitled to the Inheritance?
If someone dies and leaves behind a will or living trust, their wishes will always rule supreme in regards to who receives their possessions. It’s when deaths are unexpected or the decedent doesn’t leave a will that things get tricky. In this circumstance, Indiana uses intestate succession to pass on property that is solely in the decedent’s name.
Indiana Statute 29-1-2-1 clearly outlines the rules for intestate succession, which are as follows:
- If the decedent has a spouse with shared children, half of the estate goes to the spouse and the other half is divided amongst the children equally.
- In the event the decedent has a spouse along with children from a different relationship, the spouse keeps all marital property, 1/2 of the decedent’s personal property, and 1/4 of the value of any personal real estate. The remaining property gets equally distributed amongst the children.
- In the event that the decedent has a spouse but no children, the spouse inherits everything.
- If the decedent has children but no spouse, the children inherit everything equally.
- Assuming the decedent only has a spouse and parents surviving them, their spouse will inherit 75% of all non-marital property and parents will receive the other 25%.
- If the decedent has no children or spouse, the next in line to inherit everything is their parents.
- In the event the decedent has no children, spouse, or surviving parents, their siblings will inherit everything.
- If no close or distant relatives (including cousins or nephews) can be found, the entire estate will go to the State of Indiana.
In Indiana, if the deceased only has living grandchildren (and not children), the grandchildren can take the place of “children” in the above sentences.
If the decedent co-owns the property with a spouse or other parties, they can’t will their portion to someone else. Ownership automatically gets split amongst the other co-owner(s) through the right of survivorship. For example, let’s say a group of three friends co-own a rental home and one of those friends passes away. The other two friends split the decedent’s ownership equally. This rule applies to homes, money (joint bank accounts), businesses, and all other assets. Despite what their will says, the right of survivorship always takes precedence.
Estate & Inheritance Tax
When reading this title, you might wonder, “what is inheritance tax and how does it differ from estate tax?” Well, let’s clear that up. Estate taxes are paid for by the decedent’s estate before assets can be distributed to their beneficiaries. On the flip side, inheritance taxes put the financial burden on the beneficiaries themselves.
Federal Estate Tax
With the passing of a new tax bill in December of 2017, federal estate taxes will be different for 2018-2025. Federal estate taxes only apply to estates that exceed $11.18 million in worth. While most estates fall below that limit, some don’t. In those cases, the tax rate is determined by the total taxable estate after deducting $11.18 million from the gross value. The federal estate tax rates can vary between 18-40%.
State Inheritance & Estate Tax
Only 17 states have an additional inheritance or estate tax. Fortunately, Indiana is no longer one of them. While they used to collect an inheritance tax, for any inheritance after January 1, 2013, there is no separate inheritance tax in Indiana. The only “death” tax that applies to Indiana estates is the federal estate tax.
How Inheritance / Estate Tax Applies to a House
The above taxes do not solely apply to cash assets. There is also inheritance tax on property, which can be calculated one of two ways.
The first way is through the fair market value on the date of the decedent’s death. Hiring an appraiser is often the easiest way to determine fair market value. In the event that you’d rather save a little money, you might also be able to ask a few real estate agents what their valuation would be using comparable properties in the area as a basis. Because they will look at it as a business opportunity, they aren’t likely to charge you for this basic service. This method of valuation is most common.
However, the second way to value the home is through the use of an alternate valuation date. The alternate date would be six months from the day of the death. The person representing the estate can choose either date as long as using the alternate would reduce the value of the overall estate. What this means is that you can’t pick and choose which assets you categorize at which dates. It’s all or nothing for the entire estate. This is great if the overall estate is considerably lower value on one of the dates because it would allow for cheaper estate taxes.
On the flip side, if you expect to sell the home at a later date, using the lowest valuation could increase your capital gains tax liability. Oh, the joy of taxes! Let’s dive into capital gains tax now so you can understand the full picture.
Capital Gains Tax
We’ve written at length about inheritance and capital gains. Below, is our best summary of past articles, but if you’d like more information specifically on this section, please visit our Inheritance page.
How it’s Calculated for Inherited Property
Normally, capital gains taxes would be based on the difference between sale price and the total investment in an asset (original cost plus improvements). In a very basic sense, capital gains tax liability would be calculated from the profit made. However, because inherited homes weren’t purchased by the person inheriting them, the initial cost is adjusted using the step-up basis.
When a person dies and leaves their house to a loved one, the fair market value of the home on the day of their death is what is used as the beneficiary’s original cost. Regardless of whether or not the decedent purchased the house for $20,000 decades ago and put $100,000 worth of improvements into it, if it could sell on the market the day of the death for $500,000, that’s the number that is used for its valuation. The same process applies to stocks, bonds, and other investments.
This might seem unimportant, but it’s actually really beneficial for the person inheriting the property. If they had to pay capital gains on the “profit” that was based on the purchase price from decades ago, they’d be losing a lot of money to taxes. This step-up basis allows them to minimize their overall capital gains tax liability substantially (in many cases).
Various Tax Brackets
Capital gains tax rates vary depending on various circumstances, such as how long you’ve owned the asset before selling it. Short-term capital gains are applicable on assets you’ve owned for less than one year. This type of capital gains has tax rates that vary between 10 and 39.6%. Long-term capital gains are applicable on any assets you’ve owned longer than one year. This type of capital gains has tax rates that vary between 0 and 20%. Exact rates for both types of capital gains vary depending on marital status, total earned, and what tax bracket the seller is in.
There is a reason short-term assets have higher taxes. The government taxes investors at a higher rate and even though they could, investors don’t normally hold onto the property as long as someone who owns the property for personal use. One of the easiest ways to save money on capital gains taxes is to hold onto an inherited asset for at least a year. As you can see, this can quickly cut your tax liability in half.
If you want more tips for how to avoid capital gains tax on inherited property, keep reading! The United States government included another safety net specifically to protect homeowners when selling their primary residence. You might be able to use this specific homeowner exemption to protect you from extreme capital gains tax rates when selling the inherited property.
To be eligible, you have to meet three conditions:
- Own the home for a minimum of two years within the five years preceding the sale.
- Use the home as your primary residence for at least two years in the same five-year period.
- You haven’t excluded gains from a different home sale in the two-year period before the sale.
If you can find a way to meet these requirements before selling your inherited home, you could be eligible for exemptions of either $250,000 or $500,000 (depending on your marital status).