Do You Pay Capital Gains Taxes on Property You Inherit?

with 4 Comments

When you inherit property, such as a house or stocks, the property is usually worth more than it was when the original owner purchased it. If you were to sell the property, there could be huge capital gains taxes. Fortunately, when you inherit property, the property’s tax basis is “stepped up,” which means the basis would be the current value of the property.

For example, suppose you inherit a house that was purchased years ago for $150,000 and it is now worth $350,000. You will receive a step up from the original cost basis from $150,000 to $350,000. If you sell the property right away, you will not owe any capital gains taxes. If you hold on to the property and sell it for $400,000 in a few years, you will owe capital gains on $50,000 (the difference between the sale value and the stepped-up basis).

On the other hand, if you were given the same property, as opposed to receiving it upon the owner’s death, the tax basis would be $150,000. If you sold the house, you would have to pay capital gains taxes on the difference between $150,000 and the selling price. The only way  to avoid the taxes is for you to live in the house for at least two years before selling it. In that case, you can exclude up to $250,000 ($500,000 for a couple) of your capital gains from taxes.

4 Responses

  1. Nalria Gaddy
    | Reply

    If the property has been transferred to a trust, how is the cost basis determined? Does the trust then pay the capital gains when the property is sold?

    • Patrick Smith
      | Reply

      Most trusts, including yours, are what the IRS considers to be a “grantor” trust. What this means is that the trust is essentially disregarded for tax purposes (a good thing) and is taxed or treated for tax purposes as you – the individual. Basis would be determined as normal: what was the value of the property when you paid for it / bought it, inherited it, etc. For instance, if you inherited a piece of property 30 years ago worth $100,000 at the time of inheritance, and now desire to sell it at $200,000, your capital gains amount to be taxed would be the sales price ($200,000) less the basis ($100,000) equals capital gains of $100,000.
      NOW, as a side topic, to avoid paying capital gains taxes on that property you could consider doing one of a few things. First, you could do a tax free exchange (1031 exchange) into a “like-kind” or similar type of property. Secondly, you could consider using a CRT or charitable remainder trust trust to avoid capital gains taxes. We have discussed 1031 exchanges, but here is an article on the CRT. There are a couple different types of CRTs – we’d love to discuss it with you sometime if interested! 🙂
      Click here for our CRT article

  2. Bill Jones
    | Reply

    I have similar questions about tax liability for an inheritance of bank accounts of multiple hundred thousands at the death of a parent. Is there any tax liability there?

    • Patrick Smith
      | Reply

      As long as the total value of the estate belonging to the parent that passed away was under $5.49 million (2017 figure), there are no federal estate taxes (I.e., death taxes). Moreover, there will also be no state death/inheritance taxes, if you are in Georgia or another state that has the same limit as the federal government.

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