Received an inheritance share from sale of parent's property and a CA sales tax portion was paid. Is that CA sales tax amount a deduction on my Federal tax form?

[MonikaK1]

Whether you can deduct the sales tax paid on the proceeds of the sale depends on how you elect to report your sales taxes. The Internal Revenue Service (IRS) permits you to write off either your state and local income tax or sales taxes (not both, with some exceptions) when itemizing your deductions. People who live in a state that does not impose income taxes often benefit most from this deduction.

See this TurboTax tips article for more information about how to deduct sales taxes.

To determine if the sale of inherited property is taxable, you must first determine your basis in the property. The basis of property inherited from a decedent is generally one of the following:

• The fair market value (FMV) of the property on the date of the decedent's death (whether or not the executor of the estate files an estate tax return (Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return)).
• The FMV of the property on the alternate valuation date, but only if the executor of the estate files an estate tax return (Form 706) and elects to use the alternate valuation on that return. See the Instructions for Form 706.

See this IRS webpage for more information.

[Opus 17]

Sales tax?  You mean like the extra 6% on a bag of potato chips?

Do you mean capital gains tax?  Sometimes in the state of California, the closing agent is required to withhold capital gains tax on the sale.  When you report the sale on your California tax return, if the tax that was withheld is more than you owe, you get a refund.

https://www.ftb.ca.gov/pay/withholding/real-estate-withholding.html

When you sell an inherited home it is likely that you owe no capital gains tax to either the IRS or California, but California makes you do the extra paperwork.    This would be a state and local income tax deduction on your federal return, but it is limited by the $10,000 cap on all state and local taxes (the SALT cap).  

Can you clarify the circumstances?

[heartgems68]

The taxed amount was about 3.5%

[Opus 17]

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@heartgems68 wrote:

The taxed amount was about 3.5%

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OK, as I suspected, this is not a "sales tax."  This is a mandatory withholding of capital gains tax, in case the seller fails to report the sale on their tax return, at California keeps something.  However, if you don't owe the tax, you can get a refund. 

Are you a resident of California?

https://www.car.org/-/media/CAR/Documents/Transaction-Center/PDF/QUICK-GUIDES/Quick-Guide---CA-Withh...

[heartgems68]

Yes

[DianeW777]

Since this tax is applied like a withholding, there is nothing to deduct on your California (CA) tax return.  If it was withheld in 2023, and if you itemize your deductions it could be deducted on your federal return.  Any refund in 2024 would potentially be income for your 2024 tax return, only if you do use it for your itemized deductions in 2023.

[Opus 17]

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@heartgems68 wrote:

Yes

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Super.  So what happens is, you must report the sale of the house on your federal return, and it will flow to the state return like usual.  On your state return, you will get credit for this amount as part of your state income tax withholding (it's a state tax payment for income taxes, similar to any other estimated state taxes you paid or your w-2 withholding.).  You will probably need to enter it into Turbotax as a state tax payment (Estimates and other taxes paid).  Then, if your total state tax owed is less than your total payments and withholding, you get a tax refund.

As a state tax payment, turbotax will automatically include it as a federal tax deduction along with your other state taxes (but your deduction may be capped by the $10,000 cap on state and local income taxes.)  It's not a deductible tax in California because CA state income tax is not deductible on a CA state return.  

You report the sale of the inherited home under the income section for "Sales of stocks, bonds and other investments."  Use the category "Something else" for what you sold.  Only use "your home" if you personally lived there.  For the date acquired, use the date of your mother's death.  For the price or value, use the fair market value on the date of her death.  For the selling date and sales price, use those figures from the sale.  (Actually, for all these values, use your share of the total.  For example, if the home was inherited equally by 3 siblings, use 1/3 the sales price and 1/3 the fair market value.)   If you sell the property close in time to the death of the previous owner, the fair market value will equal the selling price and you will have no taxable gain.  If you held the property for a long time, you might have a gain, and you might need an appraisal from when your parent died to get the fair market value at that time.

Since in most cases, selling an inherited house does not count as taxable income, you will get this 3-1/3% withholding back from the state as part of your state tax refund.