You just inherited a house, and you’re deciding to either sell the house or move into the place. Well, before you decide anything, you should hear about all the taxes that you might have to pay. Depending on your state, this could mean inheritance tax, and possibly capital gains tax. But don’t worry, knowing what to expect is half the battle. To find out which of these taxes apply to you, keep reading!
The first thing you need to know about inheritance tax, it's completely different from an estate tax. It's extremely important to know the difference because the two terms are often used interchangeably. But don’t be fooled! These taxes are NOT the same thing. Inheritance tax is a tax that a person pays when they receive an inheritance. An estate tax is a tax that is paid with funds found within an estate. Many people get these two confused is that they consider a house to be an estate. When in reality, a house is only part of an estate. An estate is everything a person solely owned before passing away. This can include cars, money, antiques, life insurance and more.
Now that you know the difference between inheritance tax and estate tax, it’s important to know when inheritance tax applies to you. If you’re inheriting a house from a deceased person, you have to check if your particular state has an inheritance tax.
For example, states like Washington D.C. and Virginia don’t have an inheritance tax, but Maryland has a 10% tax on inheritance. If you live in a state with inheritance tax, don’t worry just yet. You could be exempt from paying inheritance tax. In Maryland, for example, immediate family members of the deceased person and certain non-profits are exempt from inheritance tax. So make sure to check your specific state laws and check to see if your state has any exemptions.
Capital Gains Tax
If you just inherited a house and want to sell it, you may have to worry about capital gains tax. This is a tax that occurs if you sell an inherited property, without living in it for at least 2 of the last 5 years. If you have lived in the property for more than two years in the past 5 years, you can be exempt from capital gains tax up to a certain amount. If you are single, the amount is $250,000. If you are married, the amount is $500,000.
But how do you know how much tax you pay? Well, there’s a formula.
(Sale Price) - (Fair Market Value of the House at the Date of the Owners Death)
- If the number is positive, then you pay capital gains tax on that amount.
- If the number is negative, then a capital loss can be claimed on your taxes and $1.5 thousand of that can be deducted from your income taxes ($3 thousand if filing with a spouse).
Here are two examples:
Sarah inherits Brad’s house. She has the home appraised, and it’s found to be worth $600 thousand. Sarah then sells the house 2 months later for $605 thousand. Sarah then pays capital gains tax on the $5 thousand ($605 thousand-$600 thousand).
Sarah inherits Brad’s house. She has the home appraised, and it’s found to be worth $600 thousand. Sarah then sells the house 2 months later for $550 thousand. Sarah then claims a capital loss of $50 thousand ($550 thousand- $600 thousand). Sarah is not married and therefore deducts $1.5 thousand from her income taxes.
*Here’s a Capital Gains Calculator to make things a little easier for you.*
Selling Your House
If you’re thinking of selling your inherited house, call Express Homebuyers to receive a fair cash offer in minutes! And once we make a deal, we’ll also provide you with a free probate attorney to help you through the entire probate process. Call us today to find out more information!
DISCLAIMER: State and Federal tax laws change on a frequent basis. As a result, the following information may not reflect current tax laws and is in no way a substitute for legal advice. For tax or legal advice, please consult with an accountant or attorney.