The Tax Ramifications Of Selling An Inherited Home

The Tax Ramifications Of Selling An Inherited Home

There is a lot of confusion about the tax ramifications of selling an inherited property on Long Island, NY or in your local area.  If you are in this situation, it is important to know what to expect from the taxes and how these taxes are calculated. The confusion regarding the taxation of inherited property comes from the fact that there is no tax liability upon inheritance, but there is a liability on the profits of the sale.  

The Calculation Of Capital Gains

When you sell a house, you will be charged capital gain tax on the profit.  The amount of capital gains tax that you pay on the sale will vary depending on your income.  The range for this tax is between 0% and 20% of the profit made when selling the house.

To determine the capital gains that you will be taxed on, you will need to subtract the cost of the house when you purchased it from the sale price.  The capital gains tax will be charged on this difference, but if there is a negative difference you will be able to claim this back on your taxes. It is important to note that you might be eligible for capital gains exclusion.  This exclusion is up to $250,000 if you have lived in the house you are selling for 2 years out of the last 5 years.

Using A Stepped-Up Basis For Tax

The problem when you inherit a home is that you will have to pay capital gains which are calculated in a different way.  The capital gains tax for the sale of inherited homes will be based on the value of the home on the date of the previous owner’s death.  This type of taxation is known as a stepped-up basis for tax payment on inherited homes.

An example of this will be someone who has inherited a house from their grandparent.  If the house was worth $150,000 when the previous owner died and you sell it for $160,000 you will need to subtract the $150,000 from the $160,000.  This leaves a profit on the sale of the property of $10,000 which is taxable under capital gains tax.  

It is also important to note that when you sell a home you have inherited, you will not be eligible for any exclusion on capital gains tax.  However, if you are selling the home for less than the stepped-up basis, you will be able to deduct the loss on your tax return. You will be able to deduct up to $3,000 per year in this way.

What About Improvements To The House?

If you have made any improvements to the property prior to sale such as redoing the roofing, kitchen or bathroom, you need to know how this will affect your tax.  In these cases, you will be able to use the cost of these improvements to reduce your tax bill.  You will be able to subtract the costs of the improvements made to the house from the amount you owe capital gains on.  However, you will need to have documents to prove the value of the improvements.

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The Tax Ramifications Of Selling An Inherited Home
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The Tax Ramifications Of Selling An Inherited Home
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There is a lot of confusion about the tax ramifications of selling an inherited property on Long Island, NY or in your local area.  If you are in this situation, it is important to know what to expect from the taxes and how these taxes are calculated. The confusion regarding the taxation of inherited property comes from the fact that there is no tax liability upon inheritance, but there is a liability on the profits of the sale.
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Abstract Home Solutions
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