Selling any asset for more than you paid for it can trigger capital gains taxes. But what if you didn’t pay for it, but rather inherited it? Unfortunately, you can still be on the hook for taxes if you inherited a house and want to sell it.
What Is Capital Gains Tax?
There is often a false assumption that the capital gains tax only applies to rich people, but in reality, the things many of us own (car, big screen TV, stocks and bonds, home) all count as capital assets. If you ever sell those things for more than you paid to acquire them, you may be facing a tax burden.
This tax comes into play often in real estate transactions. If you bought a home for $100,000 years ago, but the area has become a hot spot and you’re now able to sell it for $400,000, that $300,000 in profit you made will be subject to taxation. Thankfully, there are ways to qualify for exemptions so that you’re not penalized for the entirety of the gain.
Capital gains tax on inherited property behaves a little differently though. Since you didn’t purchase the home in the first place, the calculation for profit is done on what is called a “stepped-up basis.”
Say your Aunt Marge bought the home for $75,000 back in 1950, but you’re able to sell it for $250,000. Instead of being taxed on the full $175,000 difference, you’ll only be taxed on the difference between the sale price and the fair market value at the time of her death.
In order to find out the stepped-up basis of the home, you’ll need to have it appraised as soon as possible after the owner’s death. This will give you an idea of what you’re working with and whether it’s a good idea to hold on to the house or to go ahead and sell it.
What Are the 2019 Rates?
Tax rates change slightly every year based on inflation and other political factors. For the 2019 tax year, the tax percentages on capital gains range from zero percent to 20 percent, depending on the amount of profit you made from the sale.
If you’re single, you won’t be taxed on any gains under $39,375. If you make between $39,376 and $434,550, your rate will be 15 percent. Over $434,551 and you’ll be charged a 20 percent rate.
If you’re married, those thresholds increase, and anything under $78,750 will be exempt. $75,751 to $488,850 will be at a 15 percent rate, and anything over $488,851 will be at 20 percent.
How Can I Avoid It?
Receiving bequeathed property from a loved one, while a beautiful gesture, can be very stressful. You can avoid the capital gains tax by making the home your primary residence for two years, thus qualifying you for the homeowner’s exemption on any gains under $250,000 (if you’re single) or $500,000 (if you’re married).
But if you already have an established home, moving into the house may not be an option. It could be in another neighborhood, city, or even state. It might be too small for your family’s needs, and you may have no interest in maintaining it and renting it out. (Landlord life isn’t for everyone!)
If you inherited a house and want to sell it, the last thing you need is to be punished financially for it. The best way to avoid paying capital gains tax on inherited property is to sell it as soon as possible. If you’re not interested in fixing up the home or going through the long, often costly process of navigating the traditional real estate market, a cash homebuying company could be a great option for you.
Meridian Trust has worked with hundreds of sellers after inheriting property from a loved one. We work exclusively with individuals and can have you at the closing table within 30 days. Give us a call today to get started!