Tax Consequences of Selling an Inherited Home

By Mark Kennan

If you sell an inherited home, you have to share the news with Uncle Sam because you'll owe income taxes if you have a gain, or made a profit. However, a loss could allow you an income tax deduction. Figuring your gain or loss on the sale depends on when the decedent died and how you used the home.

Taxation of Gains or Losses

The sale of an inherited home is treated as a capital gain or loss for income tax purposes. Capital gains or losses are those you realize from selling things you use for personal or investment purposes, such as a house, stocks or furniture. Usually, you have to hold property for at least one year to qualify for the lower long-term capital gains rates. However, no matter how long you have owned an inherited home, any gain or loss is treated as a long-term gain or loss. Losses from personal property cannot be claimed as a deduction on your taxes. Therefore, if you used the inherited home as your own residence, it becomes personal property, and as such, so you cannot deduct a loss on the sale.

Reporting the Inheritance

The executor of the estate may have to file an estate tax return to report the inherited property. For all years, the executor only has to file if the estate exceeds the exemption amount, which is indexed for inflation, or to preserve the remaining exemption for the decedent's spouse. For 2010, an estate tax return is also required when the decedent's non-cash assets exceed $1.3 million to show the allocation of the additional basis. The "basis" of the home is the amount used to determine your gain or loss on the sale. The higher the basis, the lower your taxable gain from the sale. If you bought the home, the basis would be the amount you paid for it. For example, if you sell a property for $300,000 and you paid $250,000, your basis is $250,000 and you would only have a $50,000 taxable gain. However, different rules apply to figure the basis when you inherit a property because the tax code allows a special basis step-up.

Get a free, confidential bankruptcy evaluation. Learn More

Determining Your Basis

The basis of the inherited home depends on when you inherited it. In most years, your basis for the inherited home is the fair market value on the date the decedent died. However, for decedents dying in 2010 only, the adjusted carryover basis was used instead because the estate tax was repealed for the year. This adjusted carryover basis applies no matter what year you sell the home. The adjusted carryover basis gave the heir a basis equal to the smaller of the fair market value or the decedent's basis for the home, plus any of the adjustment allocated to the home. In 2010, the executor of the estate could allocate up to $1.3 million to increase the basis of inherited property, up to the fair market value of the property. The allocation is up to the executor of the estate. For example, if the decedent owned four houses, each of which has increased substantially in value, the executor could increase the basis of any one house by up to $1.3 million or could spread that 1.3 million evenly — $325,000 each — over the four houses. For example, if the decedent had a basis of $100,000 and a fair market value of $350,000, for decedents dying in any year but 2010, your basis for the home would be $350,000. For decedents dying in 2010, your basis would be $100,000 plus the amount of the basis increase used on the home, up to a total of $350,000. For example, if the executor didn't allocate any of the $1.3 million to the inherited house, your basis would remain at $100,000.

Reporting the Sale

When you sell the home, you have to report it on your income taxes. First, calculate your gain or loss by subtracting your basis from the amount you receive from the sale. Then, report the sale on IRS Schedule D, the form used to document capital gains and losses. Finally, copy the gain or loss over to your Form 1040 tax return. You have to use Form 1040, not Form 1040A or Form 1040EZ, in the year you sell the inherited home.

Get a free, confidential bankruptcy evaluation. Learn More
How to Receive Stocks as Inheritance
 

References

Resources

Related articles

Tax Implications for a Sole Proprietorship

When starting your own business, one of the most important decisions is how you want to organize your entity. The choice of a sole proprietorship is one of the easiest to form and easiest to report tax-wise. However, not knowing the forms to use, as well as anticipating your liability for self-employment taxes, can cause headaches come tax time if you don't do your homework.

The Difference Between Inheriting an IRA vs. Assuming an IRA

Planning retirement account expenditures can be hard to pin down, and some people have funds left over when they die. If someone dies with money remaining in an IRA, the account goes to the person the decedent names as the beneficiary of the account. Depending on your relationship with the decedent, you may have the option of assuming the IRA rather than treating it as an inherited IRA.

Does a Spouse Get Increased Value in an Inherited Home in Divorce?

There are few black-and-white answers when it comes to inherited property in divorce. An inherited asset starts out belonging solely to the spouse who received it, and it may remain that way – or it may not. It depends on what you do with it between the date you receive it and the time your marriage ends. If it appreciates in value, this is an additional factor the court must consider -- the question becomes why its value went up. Depending on the answer, the increase might be yours, or you might have to share it with your spouse.

Related articles

Can You Claim Taxes on a Home in Puerto Rico That You Inherited?

If you inherit a home in Puerto Rico and plan on using it as a personal residence or rental property, you’ll inherit an ...

The Basis for Donating Inherited Property

Donating inherited property helps the charitable organization to which the donation is made, but it also helps the ...

Inheritance of a Traditional or Roth IRA

If you’ve inherited an individual retirement arrangement, or IRA, it comes with restrictions on when the money must be ...

Can an Executor of a Will Be Responsible for the Deceased's Taxes?

Everyone has the right to disburse their assets to whomever they wish when they make a will, but the Internal Revenue ...

Browse by category
Ready to Begin? GET STARTED