Q. What is the procedure for paying taxes on the sale of inherited property?
A. You report the sale on your annual income tax return, using form 8949 and Schedule D. Form 8949 is used to calculate the capital gain on the sale which is your taxable income. Check you closing statement for a form 1099-S.
If you are asking if you need to pay some income tax at the time of the sale; probably not. See discussion on estimated tax payments below.
(Repeated form above discussion): What may be taxable is the "capital gain" on the sale of the property. The capital gain is the difference between what you sold it for and the cost basis. Cost basis is usually what you paid for the property. But, in the case of inherited property, cost basis is the fair market value on the date of death. A capital loss on personal use property is not deductible. Most inherited property, even your parent's home, is considered investment property unless you (the heir) used it for personal use. Long term capital gains are taxed at lower rates than ordinary income. For lower income people, some or all of the gain may be taxed at 0%.
____________________________________________________________________________________________
Estimated Tax Payments. You should pay in quarterly estimated taxes if you don't have enough withholding taken out to cover the tax on all your income. You might be able to increase your W2 withholding, at your regular job, to account for the extra income.
You should make estimated tax payments for the current tax year if both of the following apply:
- 1. You expect to owe at least $1,000 in tax for the current tax year, after subtracting your withholding and credits.
- 2. You expect your withholding and credits to be less than the smaller of: 90% of the tax to be shown on your current year’s tax return, or 100% of the tax shown on your prior year’s tax return. (110% if your income will be more than $150K) . Your prior year tax return must cover all 12 months.
TurboTax (TT) can prepare the quarterly payment vouchers. In your 2020 software, enter at:
Federal Taxes or Personal (H&B version)
-Other Tax Situations
-Other Tax Forms
-Form W-4 and Estimated Taxes - Click the Start or Update button
On the next screen answer No to the W-4 question
If your goal is just to avoid the underpayment penalty, then paying 100% of the prior year tax liability is the “safe haven”
Or you can obtain blank IRS Form 1040-ES from the IRS. The form and instructions are at this link: https://www.irs.gov/pub/irs-pdf/f1040es.pdf
You can also pay Federal directly here. Be sure to select 1040ES:
https://www.irs.gov/Payments
