CHAPTER 8 Inherited Home Sales & Taxes
Tax Implications of Selling an Inherited Home
Selling an inherited home may involve tax obligations, as specific tax rules apply to inherited properties. There is often confusion regarding whether the proceeds from the sale of an inherited property are tax-exempt or if capital gains tax applies based on the original purchase price. This document clarifies key tax considerations when selling an inherited home.
Capital Gains and Inherited Property
Homeowners may qualify for a tax exclusion of up to $250,000 of gain ($500,000 for married couples filing jointly) when selling their primary residence. To qualify, the home must have been the seller’s primary residence for at least two of the five years preceding the sale. Since most inheritors do not meet this requirement, they are generally not eligible for this exclusion. However, the "stepped-up basis" rule can significantly reduce taxable gains on inherited property.
Understanding the Stepped-Up Basis
The tax basis of an inherited home is determined by its fair market value (FMV) at the time of the previous owner's death, not the original purchase price. This adjustment, known as a "step-up" in basis, can reduce capital gains taxes when the property is sold. For example, if a home originally purchased for $100,000 is worth $300,000 at the time of inheritance, the new basis is $300,000. If the property is sold immediately for $300,000, no 42
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