Is the money received from the sale of inherited property taxable???

[Bees]

An inherited property that you do not live in is considered an investment and the sale follows the rules of any sale. You get a stepped up basis in the property to the Fair Market value at time of death and your holding period is automatically long term. Any gain is taxed at a long term capital gain and any loss is LT capital loss. You can take $3,000 each year against ordinary income and can carry forward the loss until used up. see http://www.nolo.com/legal-encyclopedia/if-you-inherit-home-do-you-qualify-the-home-sale-tax-exclusio... 

How the Stepped-Up Basis Rules Affect People Who Inherit Property

"Basis" means an asset's cost for tax purposes. To determine whether you have a profit or less when you sell an asset, you subtract its basis from the sale price. If you have a positive number, you have a gain. If you have a negative number, you have a loss.

The basis of a home you buy or build is its cost, plus any improvements you make while you own it. SeeDetermining Your Home's Tax Basis for details.

However, a home's tax basis is determined in a different way when someone inherits a home after the owner dies. When you inherit property after the owner dies you automatically receive a "stepped-up basis." This means that the home's cost for tax purposes is not what the now-deceased prior owner paid for it. Instead, its basis is its fair market value at the date of the prior owner's death. This will usually be more than the prior owner's basis.

The bottom line is that if you inherit property and later sell it, you pay capital gains tax based only on the value of the property as of the date of death.

Example: Jean inherits a house from her father George. He paid $100,000 for it over 20 years ago. George made $20,000 in improvements over the years, so his 's tax basis in his home just before George died was $120,000. However, when Jean inherits the home its basis is stepped-up to its fair market value on the date of George's death. Jean has the home appraised and this value is set at $500,000. Jeans sells the house for $505,000 a few months after she inherits it. Her tax basis in the house is $500,000. She subtracts this amount from the sales price to determine her taxable gain: $505,000 sales price - $500,000 basis = $5,000 gain.

If you sell an inherited home for less than its stepped-up basis, you have a capital loss that can be deducted (assuming you don't use the home as your personal residence). However, only $3,000 of such losses can be deducted against your ordinary income per year. Any excess must be carried over to future years to be deducted.

See also  http://www.irs.gov/publications/p544/ch04.html#en_US_2013_publink100072633

[Carl]

The inheritance itself is not taxable. However, since you sold the property, what matters here is the fair market value (FMV) of the property on the day it was deeded to you. If you sold it for more than the FMV, meaning you made a gain, then the gain is taxable. If you sold it at a loss, then you don't even need to report the sale, as you can't deduct that loss anyway, since it's inherited property.

[Lauriedasz]

so how do I find out what is the fair market value?

[Carl]

If you have an appraisal that was done within 2 years of it being deeded to you, then you can use the amount on the appraisal as the FMV. If such an appraisal isn't available, then you can probably find it on the website of your county's property tax appraiser. Note that the latter will usually be significantly lower than an appraisal done by a private, licensed, certified property appraiser.
Usually, (but not always) an appraisal will be done when the property is sold or refinanced. So that last mortgage holder for that property should have an appraisal on file - even if the mortgage has been paid off.

[SBA]

On this same subject of selling inherited house, does the capital gains tax exemption of $250k or $500k come into play?

[tagteam]

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@SBA wrote:

On this same subject of selling inherited house, does the capital gains tax exemption of $250k or $500k come into play?

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The Section 121 exclusion is generally inapplicable and also not typically needed since property acquired from a decedent receives a stepped up basis to the fair market value on the date of the decedent's death per Section 1014. As a result, there is usually very little, if any, gain provided the house is sold within a reasonable amount of time after death.

[didi]

My siblings and I sold the home of our deceased father. Will it be necessary for us to claim the money from that sale as an inheritance or as capital gains income? The proceeds were split between the four of us.

[tagteam]

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@didi wrote:
My siblings and I sold the home of our deceased father. Will it be necessary for us to claim the money from that sale as an inheritance or as capital gains income? The proceeds were split between the four of us.

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With very limited exceptions, an inheritance is not taxable to the heirs for federal income tax purposes. 

You father's home would receive a step up in basis to the fair market value on the date of his death. Therefore, unless there was post-death appreciation, there should be no gain to report.

[rlowman]

Is the money received from the sale of inherited property taxable if it was sold for less than FMV?

[Critter]

First the sale MUST be reported ... then on the sale ... the gain is taxable but the loss is deductible. 

[Ggeee]

I just received funds from property that I believe was originally purchased by a great uncle, then upon his death was divided between his two daughters.  When they passed, one daughter’s share went to my father.  When he passed in 2006, his share was divided between myself & 3-siblings.

my question is this:  how far back do I ask for FMV?  When my father passed or when my great uncle passed?

A trustee in Florida has been handling the property sale & apparently there are quite a few owners so I need to get on this ASAP.

[Critter]

@Ggeee 

Since everyone inherited the property you only have to look to the last decedent ... which seems to be dad in 2006. At that time the 4 of you inherited his portion ... you use the FMV as of his DOD. 

[Makeitmore]

Capital gains

[PaulaM]

@Makeitmore Gift tax (if any) would be paid by the person making the gift, not the receiving person.

Inherited property receives a stepped-up basis to the Fair Market Value (FMV) at the date of death. You would pay capital gains on any appreciation the property might have had from the date of death to the date of the sale. Generally, if you have sold the property close to the date of death there won't be much of any capital gain taxes to be paid. However, you do report the sale - gain or not. See below for reference.

IRS overview of Stepped-Up Basis

[Hal_Al]

Q.  Is the money received from the sale of inherited property taxable?

A. Simple answer: No.  But, taxes aren't simple.  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.

Q.  Do I have to pay taxes on the $24,333.73 (cash to seller) that I received from the sale?

A. No.  That is not your capital gain.  You sold it for $27,000 (your half of $54,000).  After expenses of sale you netted $24,333.73.  Your cost basis was $37,500 (half of $75,000).  You did not have a capital gain. You had a capital loss of $13,166 (37,500 - 24,334 = 13,166).  You get to deduct the capital loss on your tax return**.

**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.