The Legal Ramifications of Selling an Inherited Home
What do you do when a house suddenly becomes yours? Inheriting a home, whether from your parents or a loved one, can be an unexpected surprise. However, once the home becomes yours, it can be hard to figure out what to do with it financially.
Many people choose to keep their inherited home, but others opt to sell the home for a profit. However, this isn’t as straightforward as it might seem. There are tax ramifications of selling an inherited home that you need to be aware of. In this guide, we’ll talk about your options when you inherit a home as well as the tax ramifications of selling.
What Can You Do with an Inherited Home?
Inheriting your home opens you to a number of options. There are three main paths you can take forward:
- Move into the home
- Rent it out
- Sell the home
Each option has benefits depending on your situation, but they all come with their own tax implications. Living in the home offers the least financial problems, and it’s also an opportunity to sort through any belongings in the current house. However, be aware of any changes in property taxes since you’ll be responsible for these as the new owner.
Another option is to rent the property. This can be a good option if you want to gain some passive income without living in the property yourself. However, whether you use it as a long-term rental or a vacation rental, make sure you’re familiar with tenant laws and the different challenges of renting your property.
Finally, the last option is to simply sell the home for a profit. While this is a great way to turn your inherited asset into cash, don’t rush into this decision until you understand the tax ramifications.
What You Need to Know About Taxes on Inherited Property
In general, you only pay taxes on gains you’ve earned on the sale. Inherited homes benefit from what’s known as the stepped-up basis rule for inherited property. An easier way to understand this is with a simple formula: subtract the home’s “basis” from the sales price.
What’s the home’s basis? This stands for the tax base, and it’s determined in different ways depending on how you’ve inherited the property. If you inherited the home upon the death of a loved one, this basis for tax purposes is the fair market value at the date of the prior owner’s death. If you’ve inherited it in another way, the fair market value is based on an alternative valuation date, usually found on a tax return.
When you subtract this from the sales price, you’ll know whether you’ve earned a “gain” or a “loss.” If you’ve earned a gain, you’ll need to pay taxes on this gain. This does not qualify for the $250,000/$500,000 home sale tax exclusion since this requires you to move into the home and live there for at least two years.
Even without the tax exclusion, thanks to up to the stepped-up basis, you likely won’t need to worry about a large tax contribution. For example, if a relative dies and leaves you a home valued at $300,000 at their time of death and you sell that home for $305,000, you’ll only have a $5,000 taxable gain.
If you sell your inherited home for less than your stepped-up basis, you can deduct up to $3,000 of losses against your ordinary income per year. Using that same example getting a $300,000 home, if you sell for $290,00, you’ll have $10,000 of lost gain.
Understanding Your Tax Requirements on Inherited Property
Ultimately, taxes are complicated. If you’re not sure how to handle a home you’ve been inherited, it’s worth talking to a tax or estate attorney to determine what your specific requirement is. There are tax implications of inheriting a home that we don’t usually talk about, so don’t jump to selling until you know what the right step should be.
As you can see, you might not end up owning as much as you think. However, it’s always worth talking to a professional to protect your assets.