Do You Have To Pay Taxes On The Sale Of A Deceased Parent’s Home?

Do you have to pay taxes on the sale of a deceased parent’s home?

In this article, you’ll learn about:

if you’ll get taxed on your parents’ home
who pays the capital gains taxes – you or the estate
how to report the sale of an inherited property
how to avoid paying capital gains taxes
what the time limit is on selling the house
how to determine the value of the home

Keep scrolling to learn more.

The Hive Law Has Been Featured In

Get A FREE Consultation!

We run out of free consultations every month. Sign up to make sure you get your free consultation. (Free $350 value.)

Do You Have To Pay Taxes On The Sale Of A Deceased Parents' Home?

Yes, you do have to pay taxes on the sale of a deceased parent’s home.

When a parent passes away and you sell their home, the property often receives a “step-up” in basis.

This means its new basis is the home’s market value at the time of the parent’s death.

If you sell the home for more than this stepped-up basis, you may owe capital gains tax.

This tax is based on the difference between the sale price and the stepped-up basis.

While there are exemptions available, like the primary residence exclusion, these usually require the home to have been your primary residence.

It’s important to report the sale and any gains on your tax return.

And to be aware that tax laws can differ based on country, state, or region.

Who Pays Capital Gains Tax On A Deceased Estate?

Here is who pays capital gains taxes on a deceased estate:

If the estate sells the home: The estate is responsible for paying any capital gains tax on the sale. The sale and associated gains are reported on the estate’s tax return.
If the beneficiary sells the home after inheriting it: The beneficiary is responsible for paying any capital gains tax on the sale. The sale and associated gains are reported on the beneficiary’s personal tax return.

How To Report Sale Of Inherited Property On Tax Return

Reporting the sale of inherited property on your tax return involves several steps.

Here’s how to report the sale of an inherited property on a tax return:

Determine Stepped-Up Basis: First, establish the inherited property’s “stepped-up” basis. This is typically the fair market value of the property at the time of the decedent’s death.
Calculate Gain or Loss: Subtract the stepped-up basis and any selling expenses from the sale price of the property. If the result is positive, you have a capital gain. If negative, you have a capital loss.
Determine Holding Period: Inherited property is generally considered long-term, regardless of how long you personally held it before selling.
Report on Schedule D: Fill out Part I if you have a short-term gain or loss. Fill out Part II if you have a long-term gain or loss.
Enter Details on Form 8949:
- Report the sale details: date acquired, date sold, sales price, cost or other basis (the stepped-up value), and the gain or loss.
- Check the correct box at the top of Form 8949 to indicate the type of transaction. For inherited property, it’s usually “Box C” for the short term or “Box F” for the long term.
Transfer Totals: Transfer the total amounts from Form 8949 to the corresponding sections of Schedule D.
Incorporate into Main Tax Return: The net capital gain or loss from Schedule D will then be transferred to your main tax return form (e.g., Form 1040 for U.S. individual income tax returns).

How Is Inherited Property Taxed When Sold?

Inherited property has capital gains taxes when it gets sold.

If the estate sells the property during probate, then the estate pays the capital gains taxes.

If the beneficiary inherits the property and then sells it, the beneficiary has to pay capital gains taxes.

How To Avoid Paying Capital Gains Tax On Inherited Property

Avoiding or minimizing capital gains tax on inherited property is a common concern.

Here are some ways to avoid paying capital gains tax on inherited property:

Hold onto the Property: Since the property receives a stepped-up basis to its fair market value at the decedent’s death, holding onto the property and not selling it ensures you don’t realize any capital gains.
Use as Primary Residence: If you move into the inherited property and use it as your primary residence for at least two out of the five years before selling (in the U.S.), you may qualify to exclude up to $250,000 of capital gains ($500,000 for married couples filing jointly) from taxation.
Offset Gains with Losses: If you have capital losses from other investments, you can use them to offset capital gains from the sale of the inherited property. This can reduce your overall tax liability.
Gift or Donate the Property: Donating the property to a charitable organization can help avoid capital gains tax. If you gift the property to someone else, they inherit your stepped-up basis, potentially delaying the realization of gains.
Consider an Installment Sale: Instead of selling the property outright, consider selling it in installments. This spreads the gain over several years, which might help manage the tax impact.
1031 Exchange: In some jurisdictions, like the U.S., you can use a Section 1031 exchange to roll the proceeds from the sale of inherited real estate into another investment property, deferring the capital gains tax. However, strict rules apply, and it’s mostly relevant for investment properties.
Set Up a Charitable Remainder Trust (CRT): By placing the property in a CRT, you can sell it tax-free through the trust, receive income from the trust during your lifetime, and benefit a charity when the trust terminates.
Consult a Tax Professional: Tax laws and regulations can be complex and are subject to change. It’s beneficial to consult with a tax professional or financial planner familiar with inheritance and estate planning to understand the best strategies for your specific situation and jurisdiction.

FAQs About Paying Taxes On The Sale Of A Deceased Parent’s Home

These are other questions we get related to paying taxes on the sale of a deceased parent’s home.

Is There A Time Limit On Selling Inherited Property?

There’s no time limit for selling inherited property.

Before selling, the property must first clear the probate process.

Its tax basis is determined by the market value at the time of the decedent’s death, and this value doesn’t change over time.

However, if the property appreciates in value after you inherit it, any extra gain upon selling will be subject to capital gains tax.

In the U.S., living in the inherited property for at least two of the five years before selling allows for some capital gains to be excluded from taxation.

How Do You Determine Fair Market Value Of Inherited Property?

To determine the fair market value of inherited property, you can start by hiring a professional appraiser.

They will assess the property based on comparable sales and its condition.

Alternatively, consulting a local real estate agent can be beneficial.

They can provide a comparative market analysis using recent sales of similar properties in the area.

It’s important to note that for inherited property, the fair market value should reflect the property’s worth as of the decedent’s date of death.

If You Inherit A House Is It Taxable?

When you inherit a house, the act itself is not considered taxable income to you.

The house gets a stepped-up basis, which means its tax basis becomes its market value at the time of the deceased’s death.

However, if you decide to sell the house later on, you might owe capital gains tax on any profit made.

This is the difference between the sale price and this stepped-up basis.

Once you inherit the property, any property taxes, maintenance, or other associated expenses become your responsibility.

Get Help With Selling Your Parent's House

If you want help from a probate lawyer, fill out the form below.

At The Hive Law, we understand the importance of:

protecting your hard-earned assets
ensuring your family’s future
not losing everything to creditors and lawsuits
properly (and legally) distributing assets

We only accommodate a limited number of clients each month.

So don’t miss your opportunity to work with our probate lawyers.

Benefits of our probate services:

Tailored solutions to fit your unique needs and goals
Expert guidance in navigating complex tax and legal matters
Preservation of your wealth for future generations
Streamlined asset distribution according to your wishes

Avoid the pitfalls of inadequate estate planning strategies:

Creditors seizing your assets
Lawsuits jeopardizing your family’s financial security
Family disputes over inheritance
Costly and time-consuming probate processes

Talk soon.

Get A FREE Consultation!

We run out of free consultations every month. Sign up to make sure you get your free consultation. (Free $350 value.)

Do You Have To Pay Taxes On The Sale Of A Deceased Parent’s Home?

Table of Contents

The Hive Law Has Been Featured In

Get A FREE Consultation!

Do You Have To Pay Taxes On The Sale Of A Deceased Parents' Home?

Who Pays Capital Gains Tax On A Deceased Estate?

How To Report Sale Of Inherited Property On Tax Return

How Is Inherited Property Taxed When Sold?

How To Avoid Paying Capital Gains Tax On Inherited Property

FAQs About Paying Taxes On The Sale Of A Deceased Parent’s Home

Is There A Time Limit On Selling Inherited Property?

How Do You Determine Fair Market Value Of Inherited Property?

If You Inherit A House Is It Taxable?

Get Help With Selling Your Parent's House

Get A FREE Consultation!

Share This Post With Someone Who Needs To See It

© 2024 The Hive Law