Inheriting a property can be both a financial blessing and a tax question mark — especially when a Form 1099-S shows up in the mail. If you’ve received this IRS form after selling an inherited property, you may ask: Do I owe taxes on this?
The answer depends on several factors, including the basis of the property, how long you held it, and what the 1099-S is reporting. Let’s break it down.
Form 1099-S reports the gross proceeds from the sale or exchange of real estate. That includes sales of residential homes, land, commercial buildings — and yes, in some cases, inherited property.
If you sold an inherited property and received a 1099-S, it means the IRS knows about the transaction and expects you to report the gain (or loss) calculated using the property’s stepped-up basis (typically its fair market value at the date of death) on your tax return.
Not necessarily. Inherited property receives what’s called a step-up in basis. That means the property’s tax basis resets to its fair market value on the date of the previous owner’s death.
So, if the property was worth $800,000 when inherited and later sold for $810,000, you would only owe taxes on the $10,000 gain, not the original purchase price decades ago.
If the sales price is equal to or lower than the stepped-up basis, you may owe no capital gains tax, but the transaction must still be reported on your tax return, and supporting documentation for the basis should be retained.
If you improved the property after inheriting it, your basis increases by the amount of qualifying improvements.
And if you held the property for several years, the value may have appreciated further — meaning a more considerable taxable gain when sold.
Regardless, the IRS will use the information from the 1099-S to cross-reference your reported capital gain or loss on Schedule D of your tax return.
Unfortunately, no. A 1031 Exchange is only available for property that’s been held for investment or business use. The inherited property doesn’t qualify for 1031 at the time of inheritance, since there was no original purchase or investment intent on your part.
However, if you hold the inherited property as a rental for a period of time before selling, you may be able to convert it into investment property, potentially making it eligible for a future 1031 Exchange.
At Realized®, we specialize in helping investment property owners create tax-efficient strategies for selling, reinvesting, or transitioning wealth. If you've inherited property and are unsure about your options, we can guide you through:
Received a 1099-S for an inherited property?
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The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.