Inheritances can be the cause of headaches. Sure, they’re fantastic – after all, you’re left with an asset that you can sell in the future. However, what no one tells you is that you should expect to pay taxes for the property. And that alone can be a complex process.
In this article, we’ll go over everything you need to understand about paying capital gains taxes on a property that was passed down to you.
What Are Capital Gains on an Inherited Property?
Capital gains are the amount you gain from the sale of a specific property. Even if you aren’t a real estate investor (i.e. you aren’t in the business of buying and selling single-family homes), you are expected to pay capital gains tax as long as you profit from a property. In other words, if the property was sold at a price that’s greater than what your parents originally got it for, you got to pay for capital gains.
Do You Need to Pay Capital Gains on an Inherited Property?
Let’s say that your parents left you with a property that you now plan to sell. If its value is greater than what the person you inherited it from originally paid for it (e.g. the purchase price 50 years ago), you are expected to pay the capital gains tax. However, it’s worth mentioning that it’s not always that straightforward.
The IRS allows homeowners to use the “stepped-basis” when calculating the capital gains – this is the “new” basis that represents the value of the home at the time it was inherited, compared to when it was purchased decades ago.
For instance, say your parents purchased a single-family home for $100,000 that’s now worth $300,000. Originally, you’d need to pay $200,000 in capital gains ($300,000 – $100,000), but that would result in a great tax bill – and you don’t want that, do you? Fortunately, the IRS allows you to use toe stepped-up basis.
Let’s say that you don’t sell the property ASAP, and by the time you sell it, its value has risen to about $350,000. Now, you’d need to pay only $50,000 ($350,000 – $300,000) because the basis is based on the value at the time it was inherited by you.
However, it’s important to note that state laws are ever-changing, which is why you should consider consulting a real estate lawyer. A property management company can help connect you to real estate professionals that are experts in capital gains taxes.
How to Avoid Paying Taxes on an Inherited Property
One thing’s guaranteed – as long as you sell your property for more than its value, you’ve got to pay capital gains taxes. You won’t be able to go around the law – doing so would get you in legal trouble, anyway. What you can do is lower the taxes that you’re expected to pay the IRS. Below, we’ll break down your options to lower your tax expenses:
#1 Don’t Accept the Property
Even if you inherited it, you don’t have to say “yes” to it. Not a lot of people know this, but you can actually say no to a property that was left to you by your parent/s. You can choose whether or not you want to be the owner of someone’s assets.
If you don’t choose to be the owner, you can disclaim it, but you need to follow your state’s laws. That way, you won’t have to worry about taxes down the road – that’s because the IRS has got nothing to tax!
#2 Sell the Property ASAP
Don’t want to pay capital gains on your property? You can sell it ASAP.
Remember, your property’s basis will be based on the value at the moment that you inherited it. So, if you sell it immediately, the value won’t go up at all. The basis will be the same, and since you’ll likely sell it at its market value, you won’t be able to profit from it.
Let’s say that your parents’ property was valued at $200,000 at the time it was passed onto you. Your basis would be $200,000 since that’s the value of the property. If you sell it shortly after for $200,000, your basis would still be $200,000, so you wouldn’t have to pay a penny!
#3 Move Into the Property
Are you sure you want to sell your property? Are you sure there aren’t any sentimental reasons not to sell it? Before you sell your property and worry about taxes, ask yourself if you truly want to say goodbye to the single-family home that you grew up in.
If you move into your property, you won’t have to pay a penny in taxes as it’s now your primary residence. And if you decide to sell it down the road, you can always claim a tax deduction. When that time comes, you can consult real estate professionals such as the experts at Luxury Property Care to ensure you pay only what you owe the IRS.
#4 Turn It Into a Rental
Why would you sell a perfectly fine property when you could turn it into a rental property? That way, you can make more money out of the property your parents left for you! Not only that, but you’ll also be able to build your portfolio and become a “real” landlord – one who can simply wait for their rent to roll in.
Plus, if you partner with a South Florida property management firm, you can put repairs, maintenance, and more on autopilot. You’ll have a responsible team by your side, one that can guarantee that your property is being properly managed by the pros.
If you’ve found yourself with a property that you plan to sell, contact the experts at Luxury Property Care. Our team will guide you through the complex process of capital gains taxes. With us by your side, you’ll be able to lower your tax bills in a way that doesn’t go against the law. That’s what we’re here for, after all – to guide you through real estate law and to guarantee the legal compliance of your property.