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Do I Need to pay a Capital Gains Tax for my inheritance?

I inherited a property in Arkansas. I sold the property.
2 Replies
Level 13

Do I Need to pay a Capital Gains Tax for my inheritance?

This answer only pertains to "federal" taxes as I know nothing about Arkansas taxes.

When you inherit "property" the basis in that property - your "cost" for purposes of determining gain or loss if you subsequently sell that property - is typically "stepped up" to the fair market value of the property as of the date of death.  (There's a possible alternative date to value the property, that being 6 months after the date of death, but that's unusual and the executor of the estate should inform you if this later date was used.)

When you sell the property you can have a gain or a loss due to the difference between your net proceeds from the sale and your stepped up basis.  This would be considered a "long term" gain or loss irrespective of how long you actually owned the property before you sold it.

I believe most states follow a similar strategy for state income tax purposes but you need to make that determination yourself.

Tom Young

Level 15

Do I Need to pay a Capital Gains Tax for my inheritance?

There is no Federal tax on the inheritance itself, although some states do impose inheritance taxes. Any estate tax that might be payable (if the estate is large enough) is paid by the estate before distribution to the beneficiary. The beneficiary would be taxed on any capital gains from the sale of inherited assets, and the capital gains would be calculated based on the fair market value of the assets on the date of death (or another date selected by the executor within 6 month) of the decedent.

States with an inheritance tax include:

·         Indiana (retroactively repealed effective January 1, 2013)

·         Iowa

·         Kentucky

·         Maryland

·         Nebraska

·         New Jersey

·         Pennsylvania

Here's how to enter the sale of a second home in TurboTax:

1.   Federal Taxes (Personal in Home & Business edition), then select Wages & Income.

2.   Click I'll choose what I work on and scroll down to the Investment Income group.

3.   Click Start/Update next to the Stocks, Mutual Funds, Bonds, and Other topic (the sale of a second home falls under "Other").

4.   Click Yes to "Did You Sell any Investments...", enter your financial institution, and Continue to the Lets Find Out More About Your Sales screen.

5.   Check the Long term, noncovered or basis not reported to the IRS box and click Continue.

6.   Under the Box 8 column Line 1, enter a property description and check the Add More Details box.
Click Start at the end of the drop-down details line.

7.   Check the This sale may require special handling line (sales of personal use items – vacation home). Then click Continue.

8.   On the More Info About This Sale screen, check Second Home and click Continue.

9.   Follow the prompts to enter information about the sale of your second home.


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