Inheriting a property can be good or bad, depending on what you’re planning to do with it.
Inheriting a property can be a benefit or a burden, depending on your goals. On the one hand, you’ve received a valuable asset without having to purchase it, adding to your real estate portfolio. However, you’ll still be responsible for property taxes, insurance, and maintenance.
Holding onto the property enables you to do as you wish with it, including turning it into a passive income stream. However, there may come a time when you are ready to sell it — and this is when you’ll have to be mindful of the tax implications.
So, how is inherited property taxed when sold?
Learn more about the tax implications of selling inherited property and how you can report it in your tax return when you sell yours.
How To Determine an Inherited Property’s Value: Step-Up in Basis
The IRS calculates capital gains taxes on the sale of assets based on their fair market value. When it comes to inherited properties, the IRS determines the fair market value at the time of sale and its tax basis using the step-up in basis.
The step-up in basis is a rule for determining the fair market value of inherited properties. The IRS assesses a property’s value based on the time of the owner’s passing.
To illustrate how this works, let’s look at this scenario:
Suppose a person bought a property in 1990 when the property was worth $274,000. However, 20 years later, that same owner died. At that time, the property’s fair market value had declined by approximately 20%. This would make the step-up in basis value of the property $219,200 when inherited.
Capital Gains on Inherited Property and Step-Up in Basis Value
Selling an inherited property is subject to different rules because of the step-up in basis provision.
When you sell the property, you can do so at a price that’s above the step-up in basis value. Any profit you make above that margin will be the amount that’s subject to capital gains taxes.
Hence, if we continue the above example:
$240,000 (the amount above the step-up in basis value you want to sell for) – $219,000 (the step-up in basis value) = $21,000 (taxable for capital gains)
Do I Have To Report the Sale of Inherited Property to the IRS?
Yes. You should report your sale to the IRS using Form 8949 and Schedule D. This is where you will include the details from your 1099-S, which documents the proceeds from the sale.
How Do I Report a 1099-S on My Tax Return?
The 1099-S form documents the proceeds from real estate transactions. To report it on your tax return, follow these steps:
- Gather Your 1099-S Form and Documents Showing Transaction Costs: Along with your 1099-S form, you should have ready documents detailing the step-up in basis value of your inherited property and any selling expenses you’ve incurred.
- Fill Out Form 8949: Enter the specifics of your sale, including when you inherited your property, when you sold it, and how much you made (the amount in your 1099-S).
- Transfer Your Information to Schedule D: Schedule D or Form 1040 records your capital gains and losses.
- Complete Your Tax Return: Submit all documents, including your 1099-S, 8949, and 1040 (with Schedule D) when you file your tax return.
Key Takeaway
Selling your inherited property means having to pay capital gains taxes. These taxes are based on how much the property was worth upon the previous owner’s passing and how much profit you made from the sale.
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.
Article written by: Story Amplify. Story Amplify is a marketing agency that offers services such as copywriting across industries, including financial services, real estate investment services, and miscellaneous small businesses.
Sources:
https://www.investopedia.com/terms/s/stepupinbasis.asp
https://www.irs.gov/pub/irs-pdf/f8949.pdf
