Home Sale Tax Exclusion and Inheriting a Home

There are many reasons that a person might want to sell a home that they inherited but did not necessarily want. This could be because you live too far away to take care of it, want to use the money for it or simply do not want the responsibility of the home. When you sell a home you inherit, there are special tax rules that apply to the transaction.

Those who inherit a home usually wonder if they qualify for the $250,000/$500,000 home sale tax exclusion, but, unfortunately, the answer to this question is no. Even so, you can benefit from the rules that apply to inherited property, meaning you might not need the exclusion when selling the home after all. The simplest way to sell an inherited home is to leave it to the pros like https://www.fastcashanyhome.com/, who do all of the work.

Who qualifies for the Home Sale Tax Exclusion?

The tax law gives a homeowner a steep tax exclusion when they sell their home. As much as $250,000 of the gain from any sale that is obtained by a single homeowner comes free of tax. For married couples that file jointly, there is an exclusion of as much as $500,000 from the income. In order to qualify for this, the home has to have been used as the main residence for two years of the previous five years before the sale occurs.

When you inherit the home, you won’t qualify for this. You will need to move into it and then live there for a minimum of two years before you could benefit from the exclusion. Even so, you may not even need that exclusion due to the basis of the rules.

How Stepped-Up Basis Tax Rules Work with Inherited Property

“Basis” just refers to the cost of an asset for tax purposes. To determine if you will get a profit or loss by selling a property, you’ll take away the basis from the sales price. If you come out with a positive number, you have a gain. If the number is negative, this is considered a loss. The basis of a home you build or buy is its cost, as well as any renovations or improvements you make while owning it.

A home’s tax basis is calculated differently when someone inherits a home. When you inherit the property because the previous owner passed away, you’ll automatically obtain a “stepped-up basis.” This simply states the cost of the home for tax purposes is not what the previous owner was paying for it. Instead, the basis is the fair market value on the date of the death. This often is more than the basis for the previous owner.

At the end of the day, if you inherit a property and end up selling it later, you will be paying capital gains taxes that will be based entirely on the property value on the death date of the previous owner.

If you sell a home you inherited for a price less than its stepped-up basis, you will encounter a capital loss. This loss can be deducted under the assumption that you are not planning to use the home as your primary residence. Even so, only $3,000 of these losses can be deducted from the usual income each year. Any extra has to be carried over to the years to come to be deducted there.

In Conclusion

Though the inheritor of a home does not qualify for the large home sale tax exclusion, it may not be that big of a deal in the long run. This is due to a stepped-up basis that can give you different kinds of tax breaks, so this shouldn’t discourage you from selling the home.