Inheritance tax rules

Q: Peter and Joyce in Deer Park: We just inherited a house from an aunt who passed away. If and when we decide to sell, what should we do to pay the least amount of taxes?

A:Just like when you’re dealing with investments, a home can have capital gains or capital losses. Likewise, just as with investments, since you’ve inherited this piece of property, you’re granted what’s called a stepped-up cost basis. In plain English, this means that instead of using the original purchase value as the cost basis (like you would if it was your own home), you would use the market value at the time of your aunt’s passing.

For example, let’s say your aunt bought her home for $150,000 and the value increased to $250,000 by the time she passed. The $250,000 – not the $150,000 – is your cost basis. Therefore, if you would sell right away for $250,000, you wouldn’t owe any taxes. If you decide to wait awhile and sell for, say, $300,000, then you would owe taxes on $50,000 ($300,000 minus $250,000).

With that in mind, if you’re bound and determined not to pay any taxes on this inheritance, one of the easiest solutions is to consider selling it as soon as possible so you don’t give the property any time to further appreciate.

But that’s not your only option. You could make it your primary residence for a couple of years so it qualifies for a capital gains exclusion when you sell (up to $250,000 for individual tax filers or $500,000 for joint filers). Or you could consider turning it into a rental property using a 1031 exchange (but just be careful – this strategy can get tricky if you’re not familiar with the corresponding tax rules).

The Simply Money Point is to consult with an estate planning attorney and/or tax professional to make sure you’re choosing the best option for your particular situation.

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