4. Capital Gains Tax
Capital gains tax may apply when you sell an inherited home. This tax is based on the increase in value from the date of inheritance to the date of sale. However, selling the property shortly after inheriting it generally minimizes capital gains tax because the market value likely won’t have increased significantly. If the property is sold for more than its value at the time of inheritance, you will pay taxes on the gain, but the stepped-up basis (the property’s value at the time of the decedent’s death) helps reduce taxable gains.
5. Reporting the Inheritance and Sale
The executor of the estate must file an estate tax return to report the inherited property. The "cost basis" of the inherited property is usually the market value on the date of the decedent’s death. When selling the property, you must report the sale on your income taxes. The sale amount, minus the cost basis, determines whether there was a gain or loss. This gain or loss must be reported on IRS Schedule D and then carried over to your 1040 tax return form.
Additional Tax Considerations
In addition to federal estate taxes, some states impose their own estate or inheritance taxes. The federal government allows a tax- free transfer of up to $11.2 million for married couples and $5.6 million for individuals, with annual exclusions for gifts (e.g., $16,000 per individual in 2022). Property left to a spouse or charity typically is exempt from taxes.
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