As some of you know, my sister and I are selling the house left to us by our father. There’s a snag: The idiot lawyer who drew up the Trust forgot to include that house. This means that my sister and I will receive the proceeds from the sale outside of the Trust.
Since the Death Tax only takes effect about $600,000 (or so) and the house is selling for less than half of that, I assume that we don’t have to pay the Death Tax on it. But is an inheritance considered income? That is, do we have to pay income tax on the proceeds from the house we inherited?
Let me start off by saying that you really, really shouldn’t take my advice on this, and I’m not a lawyer. You really must talk to a tax lawyer or, at the very least, an accountant, who will also be familiar with these rules.
That being said, here’s a quick lesson in basis. Let’s say you buy a painting for $1,000 and years later sell it for $10,000. Your basis in the painting was your initial purchase price, $1,000, and you have to pay tax on the difference between the basis and the sale price, in this case $9,000.
Ah, but there are special rules when property is transferred at death. At the person’s death, the person to whom the property is left receives a “stepped-up” basis in the property, equal (normally) to the fair market value of the property at the time of death. So, let’s say a house was bought for $30K and over time appreciated to $100K, when the owner dies and leaves the house to relative X. X’s basis in the house is $100K, and no tax is owed if the house is sold for that price. If the house further appreciates before it is sold, however, tax is owed on the difference between the eventual sale price and the stepped-up basis.
I hope I’ve demonstrated that this area of tax is something you really need to talk to a pro about, especially if there are special circumstances, as there appear to be in your case.
Right. That’s kind of what we thought: The house was worth $230,000 when dad died, and we’re selling it for $275,000. That’s a difference of $45,000. I assume we can deduct expenses, including the realtor fees, inspections, improvements (paint, carpet, etc.), etc. My sister is keeping track of all that, but I’m thinking that will reduce the tax liability considerably.
All of that was based on the house being in the Trust. I’m hoping that inheritences are not considered income, but… well, “inheritences”. If that is the case, then paying taxes on the difference between the base and the selling price, minus expenses, will not be a hardship.
There are no inheritence taxes (those taxed on the recipient) in the USA. There are gift and estate taxes, but those are tax directly to the donor.
You only have to pay gains taxes on the difference between your selling price (less expenses of sale) and your basis of $230k. If your dad died more than a year ago, it’s a long-term gain taxed at 20%.
There are inheritance taxes in the USA. Currently, just under 20 states, if memory serves, have an inheritance tax. Rates can be up to 10% or more. As a direct beneficiary however, it’s likely that your rates (if there are inheritance taxes in your state) are very low. Note also that some states have their own estate taxes, independent of the federal estate tax credit.
You should really really really speak to an attorney about this.
First of all, the fact that the house was not left in trust is of little or no consequence. While a trust can be used to delay or minimize tax consequences at death, the main advantage of its use is to bypass the probate process.
Second, you and your sister are not paying the inheritance taxes. Your father’s estate will be responsible for them. This means that the tax will apply against the fair market value of the house at the instant of your father’s death. This is why the beneficiary receives the step up in basis described above. What you receive as your share upon the sale of the house, any amount over your basis will be taxed as income as indicated by bizerta and johnny.
If inheritance taxes were payable by the benificiary, as opposed to the deceased, note that estate taxes may have been lowered by the joint interest in the house by you and your sisters. Both of your interests would receive a discount in value such that the sum of your interests would be less than the total value of the house itself.
Note also that the tax code allows a credit against state estate taxes.