When selling a home you've inherited from your parents, it's important to understand the tax implications involved. The government expects a share of any income generated, including proceeds from selling your deceased parents’ home.

“Potential tax implications include capital gains and estate taxes, which can be significant. Don’t try to navigate this alone,” says Ryan McKee, a California real estate agent specializing in selling inherited homes. “While your real estate agent can guide you in the right direction, always consult with your attorney and tax professional before selling your parents’ house to fully understand any tax obligations.”

The good news is that there are tax breaks available that may reduce or even eliminate what you owe. Here is an overview of the key taxes involved when selling an inherited home:

Inheritance and Estate Taxes

Inheritance and estate taxes are similar but differ in how and to whom they are paid.

  • Estate taxes are federal taxes applied to the total value of your parents’ estate. These must be settled before any proceeds are distributed to the heirs.
  • Inheritance taxes are state taxes you, as the beneficiary, must pay on the inherited proceeds.

Twelve states and the District of Columbia impose estate taxes, while six states levy inheritance taxes. Maryland has the distinction of having both. It is crucial to understand the laws specific to your state to avoid surprises during the sale process.

Capital Gains Tax

The capital gains tax applies to any profit you make from the sale of the home, which is calculated as the difference between the property’s original purchase price and its final sold price. Fortunately, a tax rule known as the step-up in basis helps reduce your tax burden.

Under the step-up in basis, the property is valued at its market price on the date of your parents’ death rather than the original purchase price. This means you are only taxed on any increase in value that occurs between your parents' passing and the sale of the home.

Here is a simplified example:

  • If your parents bought the home for $80,000, and it was worth $280,000 at the time of their passing, the stepped-up basis would be $280,000
  • If you sell the house for $300,000, you would only be taxed on the $20,000 difference between the stepped-up value and the sale price
  • If the home is sold at $280,000 or below, no capital gains tax would apply since there was no increase in value. In the event you sell the home for less than its stepped-up basis, you may be eligible for a capital loss deduction, assuming it was sold at fair market value

In Conclusion

Understanding the tax implications of selling your parents' home is an essential part of navigating the inheritance process. From estate and inheritance taxes to capital gains, proper preparation can help reduce your tax burden. Be sure to consult with a tax professional and attorney to ensure you are aware of any obligations and benefits. When you are ready to begin the process of selling the home, reach out to Scott and the Smolen Team for expert guidance. They will help you handle the complexities of selling an inherited property smoothly and efficiently.