Ask The Experts: When are Taxes Due on Sale of Inherited House?

Ask The Experts: When are Taxes Due on Sale of Inherited House?

 By Claudia Buck

RISMEDIA, July 13, 2010--(MCT)--How to handle the sale of a parent's home is a question many baby boomers face after their parents are gone. Here are two different situations answered by Internal Revenue Service specialist Jesse Weller and estate planning attorney Tracy Potts.

QUESTION: My parents lived in a 1910 home until they passed away in the '60s. Eight siblings were willed the home, but we allowed one brother to live there until he died in 2009. The home was sold in 2010 and proceeds divided among eight heirs (gross amount: $10,000 each). Are we obligated to pay federal taxes on this inheritance? If so, how do we determine the home's tax basis and what tax forms are required?

ANSWER: Based on this information, it sounds like you and your siblings will each report a share of the home sale next year on your 2010 federal income tax returns. Normally you would each complete Schedule D, Capital Gains and Losses, showing your one-eighth interest in the sale.

Generally, taxpayers do not pay income tax on inherited property, but they do pay tax on earnings from an inheritance. The initial cost basis of inherited real estate is usually the home's fair-market value on the date of the owner's death.

If the home rose in value during the time you and your siblings owned it, there could be a taxable capital gain on the sale because the increase is considered earnings from the inheritance.

The starting cost basis for you and your surviving siblings is normally each person's respective share of the home's total value on the date of death of the parent who willed it to you.

If a federal estate tax return was filed (after your parents died), the value listed for the property generally becomes your cost basis. If a federal tax return did not need to be filed, your cost basis is the home's appraised value at date of death for purposes of state inheritance or transmission taxes.

For heirs of your deceased brother, their tax basis would normally be the home's fair market value on the date of his passing in 2009.

If you made capital improvements to the home over the years, you would add the cost of those improvements to your adjusted cost basis. Examples include adding a new room, deck or patio, installing a new heating/air conditioning system and adding insulation.

More details are in IRS Publications 523 (Selling Your Home) and 551 (Basis of Assets). More information on capital gains is in Publication 550 (Investment Income and Expenses). All are available at www.IRS.gov or by calling 800-TAX-FORM (829-3676).

Q: My mother passed away in January at age 86. She had a living trust that included her home, which was purchased in 1949. My sister and I are the trustees and beneficiaries of her estate. In February, we sold the house for $325,000 and received the proceeds. Is that money taxable to us? I seem to recall that the home's cost basis after death is stepped up to the current market value. Does this mean there would be no capital gains to pay?

A: In 2010, the children of a deceased parent may obtain a stepped-up cost basis on a total estate valued up to $1.3 million. Since you sold the property very soon after your mother's death, you may use the sales price as the property's value at time of death.

Therefore, you should not owe any capital gains tax on the sale since it appears the estate's overall value fell below this year's stepped-up basis limitation.

Generally, if you sell a home within one year after the death of the trust holder, you may use the sales price as the tax basis and therefore would not pay capital gains taxes.

(c) 2010, The Sacramento Bee (Sacramento, Calif.).
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