Inheriting a property from a family member can be a great asset to your estate, but it can also have unforeseen tax consequences. If the property you inherited has gone up in value since the original owner obtained it, you could end up being responsible for a sizable capital gains tax if you try to sell it.
As the person who inherited the property, there are a few options that may help you avoid paying capital gains tax that might be worth pursuing.
Capital Gains Tax Rules for Inherited Property
When inheriting property, such as a home or other real estate, the capital gains tax kicks in if you sell that asset at a higher price point than the person you inherited it from paid for it.
The major difference with inherited property is that the IRS allows you to use what’s known as a stepped-up basis to calculate capital gains tax liability. The step-up cost basis represents the value of the home when you inherited it compared to the original value.
The step-up cost basis wouldn’t prevent you from having to pay any taxes, it would just reduce the amount of capital gains tax that you would need to pay.
Three Best Ways to Avoid Paying the Capital Gains Tax
If you’re standing on inherited property, and looking for ways to avoid paying capital gain tax, there are three possible ways to get it done.
The first option is to sell the property immediately after inheriting it. This way, there won’t be enough time for the property to appreciate in value.
A second option is to make the inherited property your primary residence for at least 2 years. The IRS allows single filers to exclude up to $250,000 in capital gains from the sale of a home. The key is that you have to live in the home for at least two of the five years preceding the sale.
The final option is to rent out the property instead of selling it. An inherited home that’s treated as an investment property for tax purposes would still be subject to capital gains tax if you decide to sell it. But you could defer paying those taxes if you complete a 1031 exchange to purchase another investment property to replace the one you’re selling.
Experts in Capital Gains Tax at Your Assistance
Inheriting a new property can be a trying time for many. It’s a whole new challenge resting on your shoulders, and you may need some help navigating your new found responsibilities. Our team of legal real estate experts at DaMore Law are prepared to answer your questions, and guide you through this process. Visit our website for more information on all the ways DaMore Law can help you.