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mmoorefam4
Level 1

Inherited property sold

I inherited my mom's house and sold it for more than the fair market value at the date of death.  Will I have to pay capital gains taxes on the sale if I invest the whole amount into a new property?  This will not be my primary residence.  

7 Replies
martinmarks1919
Level 9

Inherited property sold

You have a gain and it's taxable. It doesn't matter what you do with the amount from the sale.....that's an old rule which no longer exists.

Opus 17
Level 15

Inherited property sold

If you already sold the property, you owe the capital gains tax.

 

If this is investment property, you may be able to do a section 1031 "like kind exchange" which allows you to postpone paying gains tax on the sale.  This must be set up in advance (which is why you can't take section 1031 if you already sold the property), and you may need the help of an accountant.  And, this only postpones the tax.  At some point, you will have to pay all the postponed capital gains tax (unless you die and leave the property to your heirs).  Whether it is a good idea to postpone the gain will depend on what you think your present and future capital gains tax rates will be. 

 

If this is personal property (a second home, you mom's old home, not used as a rental or for business) then you can't do a like-kind exchange and must pay the tax when you sell.

 

The provision @martinmarks1919 referred to applied when you sold the home you lived in and bought a replacement home, and that was eliminated in 1997 I believe. 

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
martinmarks1919
Level 9

Inherited property sold

If this is investment property, you may be able to do a section 1031 "like kind exchange" 

But it would be advisable to follow Revenue Procedure 2008-16 and that requires owning the relinquished property for 24 months before the 1031 exchange AND owning the replacement property for 24 months after the exchange among other requirements. That ownership period for the relinquished property might not be possible if the property is inherited and a quick sale is necessary or desired.

Opus 17
Level 15

Inherited property sold


@martinmarks1919 wrote:

If this is investment property, you may be able to do a section 1031 "like kind exchange" 

But it would be advisable to follow Revenue Procedure 2008-16 and that requires owning the relinquished property for 24 months before the 1031 exchange AND owning the replacement property for 24 months after the exchange among other requirements. That ownership period for the relinquished property might not be possible if the property is inherited and a quick sale is necessary or desired.


That's why I said expert advice would be required for a 1031 exchange.  I would expect that there would be an exception to the holding period for inherited property, similar to the long term capital gains rule.  But I could be wrong.

 

In any case, if this is the taxpayer's mother's house, the 1031 doesn't apply.  And if this is business property, the taxpayer probably needs advice on a lot more issues than just a 1031.  

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
martinmarks1919
Level 9

Inherited property sold

I would expect that there would be an exception to the holding period for inherited property, similar to the long term capital gains rule. 

Probably not because we're talking about a revenue procedure that provides a safe harbor....any exception would have been included in that procedure while the "long term capital gains rule" is codified....it's in the internal revenue code.

 

Opus 17
Level 15

Inherited property sold


@martinmarks1919 wrote:

I would expect that there would be an exception to the holding period for inherited property, similar to the long term capital gains rule. 

Probably not because we're talking about a revenue procedure that provides a safe harbor....any exception would have been included in that procedure while the "long term capital gains rule" is codified....it's in the internal revenue code.

 


Are you just being silly?  The reason it is called a section 1031 exchange is because it is provided for in section 1031 of the Tax Code.

https://www.law.cornell.edu/uscode/text/26/1031

 

And here's the Treasury Regulations that implement the code.

https://www.law.cornell.edu/cfr/text/26/1.1031(a)-1

 

Any revenue procedure that describes how taxpayers can implement the code and regulations to be deemed to be in compliance, is nevertheless subordinate to the code and regulations, and can't add rules and requirements not in the regulations or code.        The regulations and code don't include a holding period. 

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
martinmarks1919
Level 9

Inherited property sold

Are you just being silly?

I'm well aware of the code and regs and was pointing out that the IRS offers a safe harbor for 1031 exchanges. Ignore the procedure at your own peril because the IRS can challenge any exchange that doesn't comply with the safe harbor outlined in the rev proc. Now I'll ask you if YOU'RE being silly. After all you went through the entire 1031 procedure WHEN @mmoorefam4 CLEARLY STATED that the property had already been sold....it's even in the subject line. So it is YOU who is being silly not to mention posting totally useless and irrelevant information for the person who started this thread.

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