Unfortunately, the government takes a chunk of any income you make, and that includes the proceeds from the sale of your deceased parents’ home.
Potential tax implications include capital gains and estate taxes are best left to the experts.
The good news is, you’ll also receive tax breaks that may reduce or eliminate any money owed.
Taxes that come into play when you’re selling inherited real estate:
Inheritance and estate taxes
Inheritance and estate taxes are two similar taxes on inherited property that differ in who they get paid to and how they get paid.
In essence, an estate tax is a federal tax against the total value of your parents’ estate, which must be assessed and paid. The remaining proceeds are then distributed to the heirs.
An inheritance tax is a state tax that you (the beneficiary) pay to the state on the proceeds you inherit once your parents’ estate is settled.
The terms inheritance tax and estate tax are sometimes used interchangeably on the state level, depending upon the wording of your state’s laws. At this time, less than one-half of all states have either an inheritance or estate tax. As of 2021 Kentucky has an inheritance tax of 0% to 16% and no estate tax. Indiana and Florida do not have inheritance or estate tax.
Capital gains tax
Capital gains tax applies to the dollar amount difference between the purchase price of a house and its final sold price.
By this definition, any money you make from the sale of the house after they die is technically taxable via the capital gains tax code.
There is a tax break/loophole known as step up in basis that can reduce the amount that qualifies for the capital gains tax. The step up in basis sets the valuation of the inherited property at the date of death value, rather than your parents’ original purchase price.
So, you’re only required to pay capital gains on any proceeds above the date of death value.
Consider this simplified example:
The house was purchased for $80,000 in 1994 is now worth $280,000. If your parents sold the home, they would be required to pay capital gains on that $200,000. (Although, they would be eligible for the home sales tax exclusion.)
However, you’re inheriting the property at the value of $280,000 —which means you’ll only pay capital gains on any proceeds above that inherited value amount. If you sell the home for $300,000, you’ll potentially only need to pay capital gains on $20,000. If you sell it for $280,000 you won’t need to pay capital gains tax, as the home’s value did not increase in the time you owned it.
And if you sell it at a loss, you’ll be eligible to apply a capital loss, assuming it was sold at fair market value in an arm’s length transaction (meaning you didn’t sell it to a relative at a discounted price).
Step 9 in the process in dispensing your parents’ personal property.
