Tax Issues Related to Inheriting Real Estate
- In some cases, you may have to pay in inheritance tax rates on the value of the home that you inherit. Not everyone pays inheritance taxes because only certain states charge these taxes. If you live in a state that has an inheritance tax, you will need to come up with the inheritance tax on the real estate that you inherit and then pay it when you file your taxes for the year. This might lead to you selling the house in order to generate enough money for the taxes.
- Even though the federal government does not charge an inheritance tax, it does charge estate taxes. Estate taxes are imposed on the total volume of the estate of a deceased individual at the time of his death. When you are the beneficiary of an estate, you will not have to pay estate taxes out of your own money, as the taxes are paid from the assets in the estate. However, this could negatively affect your inheritance if the estate does not have enough liquid assets to pay the taxes. As of the time of publication, only estates over $5 million in value have to pay estate taxes.
- When you inherit a home, you also have to consider the capital gains tax implications. When the owner of the home passes away, the cost basis of the house changes to the fair market value on the day of the owner's death. This gives you a major tax break if you decide to sell the house. When you sell the house, you only have to pay capital gains taxes on the difference between the value of the house and its fair market value on the date of the owner's death.
- If you move into the house that you inherit and make it your primary residence, you may be able to get out of paying capital gains taxes when you sell the house. When you live in a house for two years out of a five-year period, the IRS allows you to sell the house and not pay capital gains taxes on the sale.
- Another tax issue to consider is property taxes. When you inherit a house, you will need to begin paying property taxes to the local government. County and some city governments charge for taxes based on the value of your property. These taxes are due once a year and help pay for schools, roads and other items within the community.