Tax Consequences of Selling an Inherited Home

By Bryan Driscoll, J.D.

Tax Consequences of Selling an Inherited Home

By Bryan Driscoll, J.D.

Selling an inherited home can lead to you owing taxes if you made a profit on the house. However, you may also be able to claim a loss on those taxes.

People shaking hands and one of them holding keys

Making this determination can be confusing. Follow these steps to help better understand the process.

1. Determine if you owe tax on a gain from the sale of the home.

On your annual tax return, you are required to list any gains or losses. The government treats the sale of an inherited home as a capital gain for the year if you made a profit. Usually you must own a house for more than a year to qualify for the government's lower rates for longer term property ownership. But all inherited property, regardless of how long you've held it, qualifies for these lower rates.

You can also include a loss from the sale of an inherited house on your tax return. However, if you used the home as your residence, then you cannot claim the loss. This is because you cannot claim losses from personal property on your personal tax return.

2. You must report the inheritance.

When a person dies, the personal representative or executor of the estate handles numerous issues. These include filing final tax returns.

On these final tax returns, the personal representative will include the home and its transfer to you. If you are the personal representative, you can complete the probate process on your own. But you can save time and headache by contacting a professional for help.

3. Determine the basis of the inheritance.

The basis of the inherited property is the amount used to determine your gain or loss on the sale. The basis is the price you paid for the home. However, there are different rules for figuring out the basis as it applies to inherited property.

The basis on an inherited home is determined not by the price the owner paid for it but the fair market value at the time of their death. If the owner paid $100,000 for the home but today it's worth $300,000, your basis for inheritance purposes is $300,000.

When you sell the home, the Internal Revenue Service (IRS) taxes you on the gains you made. If you sell the home for $400,000, then your capital gains on the sale of the property are $100,000. This means you would owe tax on the $100,000 amount, not the full sale price of the home.

4. After you've sold the home, you must report it on your taxes.

After you've completed your calculations from the sale of the home, you must report the gain or loss on your personal income tax return. When you file your taxes, you will use IRS Schedule D to notify the IRS of the sale and the gain or loss you received. You attach Schedule D to your personal tax return.

You must report the sale of the property in the calendar year in which you sold it, not the year you inherited the home. Making sure you follow these steps will help to make sure you report the sale of the inherited home correctly and accurately.

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