Q: I inherited my mother’s family home. That part worked, but I wasn’t informed. What I just learned, and Ilyce’s site ( ThinkGlink.com ), has given me more clarity when it comes to inheriting a home.
- If your home is your primary residence, you can benefit from paying less taxes, but that wasn’t the case for me.
- If the home is held in a trust and you sell the home within one year of the owner’s death, you don’t have to pay taxes.
In my case, my mother passed away in August 2020 and the trust transferred it to me in September 2021. I then sold her in July 2022 because the family was renting from the trust until her June 2022. What taxes do I have to pay on the sale of an inherited house?
A: Before I answer your question, I would like to clarify a few things. The first item is that if you are single and have lived in the property as your primary residence for two of the past five years, you are single and exempt up to $250,000 of your gain from federal tax when you sell the home. You need to know that you can. Up to $500,000 in benefits if married.
This home sale exclusion applies if the mother sells her home before her death. This system also applies if you inherited a house, subsequently moved, and used it as your primary residence for two of the past five years.
Now, let’s talk about what happens to the value of your home when you pass away, from an Internal Revenue Service (IRS) perspective. Let’s say your mom buys a house for $250,000 and she dies when the value of her estate is $500,000. The IRS allows her to increase the basis of the house when she dies. This means that she will inherit the house at the value of the house at the time of her death, which is $500,000.
If you sell the home within a year of her death, the IRS will consider the sales price to be the value of the home at the time of her death. This means that she will not owe any taxes to the IRS on the sale. House’s. This rule applies whether the home is owned in someone else’s name or in the name of a living trust. A living trust makes it easy to transfer ownership of a home after the owner dies. (We strongly recommend placing your home in a living trust rather than adding your children to your home ownership.)
Heirs receive huge profits. They inherit a home that may have increased in value considerably, but they can ignore what the owner paid or what was done to the property over the years. Simply put, if someone passes away and gives you a home, and you sell it soon after their death (within a year), there is no tax on the sale of the home to the IRS. For more information, see Publication 523 on the IRS website.
Now, back to your question. Your mother passed away in 2020. When she died, her home belonged to her living trust, and your mom was probably both the trustee and owner of her trust. When she dies, you become her successor trustee and successor owner of her trust. (This is true in most cases.) You could have transferred her home into your name at any time after her mother died.
The important thing is that when your mother died, you inherited the house at the value of the house at the time she died. Let’s say that her house was worth $500,000 when she died. You then transferred the house to her name in 2021 and sold the house in 2022. So the most important thing here is what the house was worth when she died (her $500,000 in this example) and what you got for it when you sold it. that.
Let’s assume that when you inherited a house, the house was worth $500,000. Two years later, he sold it for $550,000, making a profit of about $50,000. However, we paid a sales commission to the real estate agent and had other closing costs.
You may have had work done to get your home ready for sale (carpet replacement, painting, staging, etc.). Some of these expenses (e.g. $15,000 worth) will reduce your profit on the sale of your home. So if your commission is 5% ($25,000 of the sales price), your closing costs are $10,000, and you spent $15,000 carpeting, painting, and staging your home for sale, you won’t make a profit on the sale.
You’ll have to look at the actual numbers to see what the profits were. But if the value of the house hadn’t increased since the time her mother died, she probably wouldn’t have had to pay as much in taxes. One wrinkle is the fact that it was a rental property for two years after we inherited it. Without going into details, you are holding your home for investment purposes and will be paying long-term capital gains on the profits you make from owning the home. You will also need to recover the depreciation you received at that time.
At most, you’ll be paying 23.8% combined federal and state income taxes (20% maximum capital gains tax and 3.8% net income tax). You should consult a tax professional (a CPA, registered agent, or tax advisor) to ensure that you benefit from all allowable deductions and expenses that may reduce the profits generated from the sale of your home.
More information on these items and examples is available from IRS Publication 523. Thank you for your question.
(Iliese Grink is the author of “.100 Questions Every First-Time Home Buyer Should Ask (4th Edition). She is also the CEO of best money move, a financial wellness technology company. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through their website. ThinkGlink.com. )
©2023 Ilyce R. Glink and Samuel J. Tamkin. Distributed by Tribune Content Agency, LLC.