Selling An Inherited Home: Three Important Tax Considerations
Managing an inherited property can take a lot of work, and annual property taxes are sometimes unaffordable for people who inherit. Therefore, many people are eager to quickly sell inherited properties.
The following are four important tax considerations that can help you figure out if or when you should sell an inherited property:
Budgeting for property taxes
Property taxes are often the biggest impetus to sell because they can be very high in some states. As an example, annual property taxes are currently at $7,335 in New Jersey for a home with a median value. More expensive properties could have even higher annual property taxes due.
If you've inherited a home, you need to figure out how much you'll need to be paying out every year in property taxes to keep the property. If you don't pay these taxes, the home will be repossessed, and you will miss out on the money you could have made by selling it.
If property taxes will clearly be unaffordable for an inherited home, begin looking for a buyer as soon as possible once the estate has gone out of probate and the property is officially yours.
Calculating the basis when inheriting the home
In addition to property tax values, the basis value for the property in question is another important value you'll want to consider. The basis value is important in determining how much taxes you will owe if you sell the home.
The basis value of an inherited property is typically calculated to be the market value of the property at the time it was inherited. Normally, the basis value for a property is the amount the owner paid to buy it. Of course, the owner doesn't have to pay for a property he or she inherits. Therefore, the basis is usually considered to be the amount of money the owner would have had to pay if the property had been purchased rather than inherited
If you sell a property you inherit immediately after inheriting it, you will have to pay taxes on the difference between the closing amount and the basis value. This difference is known as a capital gain or loss depending on whether it is positive or negative. For example, if the basis is determined to be $150,000 and you sell the home for $200,000, you will have to pay taxes on $50,000 in capital gains.
How long you live in the inherited property
If you're thinking about selling an inherited property, it's important to be aware of the fact that you could save a lot of money in taxes by living in the property for a period of time before selling.
If you live in an inherited property for a period of two years, it will be considered to be a personal residence. This means that you will be able to exclude up to $250,000 of your capital gains earnings if you're single and $500,000 or your capital gains earnings if you're married.