Taxes on Inherited Property
Key Points – Taxes on Inherited Property
- Inheriting Real Estate Can Also Lead to Inheriting a Tricky Tax Situation
- An IRS FAQ: Is Money Received from the Sale of Inherited Property Considered Taxable Income?
- Understanding the Impact of a Step-Up in Basis
- An Example of Property Inheritance from One of Our Clients
- 5 Minutes to Read
We’re All Ears for Your Real Estate-Related Questions
While the housing market has cooled off this summer as interest rates continue to rise, the number of real estate-related questions our advisors have received has been heating up. Today, we’re going to focus on the taxes on inherited property.
For starters, you usually won’t be required to pay capital gains taxes on inherited property until selling the property. Your basis is “stepped-up” to the Fair Market Value on the date of death, regardless of what the decedent originally paid for the property. If the value of the property increases, you would owe taxes on the gain between when you inherited the property and when you sold it.
Taxes on inherited property is one of many reasons why we focus so much on tax planning at Modern Wealth Management. We’re committed to helping people pay the least amount in taxes not only in one year, but over their lifetime.
Back in April, we published an article titled, Taxes on Retirement Income, which covers taxes on Social Security income, pension income, annuity income, IRA withdrawals, and interest income. We covered those topics to discuss a common question we hear from clients: “How will my retirement income be taxed?”
Going More in Depth About Taxes on Inherited Property
That’s a question we know we’ll continue hearing for years to come. Considering that the question, “Is money received from the sale of inherited property considered taxable income?” is on the IRS’s list of Frequently Asked Questions, we figured it would be appropriate to answer that in more detail as well.
To get your answer to that question, you need to figure out your basis on the inherited property. The basis of inherited property from a decedent is usually the property’s fair market value at the time of one of two events. One of the events is the decedent’s death. The other is the alternate valuation date, but that only applies if Form 706 is filed by the estate’s executor and they want an alternative valuation on it.
Given how the tax code seems to constantly be changing, don’t feel bad if you have a lot more questions about taxes on inherited property (or taxes on anything in general). In 2015, Congress passed a law that calls for the inheritor’s basis in certain property to align with the property’s end value for federal estate tax purposes. A penalty can be enforced if the person who reports the selling of the inherited property applies a basis that is more than the property’s end value.
A CFP® Professional Can Help with Confusion Over Taxes on Inherited Property
If you do feel like you have a good grasp on understanding taxes on inherited property, that’s great! But even if you do, we highly recommend that you consult a CFP® Professional. Even with setting the issue of taxes aside, inheritance can oftentimes be a stressful situation.
While we oftentimes send condolences to our clients following a death in their family, we know the biggest way we can help is to relieve some of their stress by implementing various financial planning techniques so they can focus on grieving rather than falling upon any financial hardships in the process.
A Client Example About Taxes on Inherited Property
To provide some additional clarity on taxes on inherited property, let’s look at a scenario that Modern Wealth Management CFP® professional Matt Kasper recently reviewed with one of his clients. After Matt’s client and her brother mourned the passing of their mother in 2021, they went through probate and recently settled on 50/50 ownership of their mother’s home. They just closed on the home and agreed to sell it for $300,000, so she received $150,000.
Upon being informed about that, Matt knew that the selling of the home would be a tax event. The client and her brother needed to figure out their basis since they hadn’t done an appraisal when they inherited their mother’s home.
What’s Their Basis?
As Matt thought about how to help them figure out their basis, he needed to know the property tax value. Real estate taxes were paid on the property value of $220,000, but his client knew that was well below the market value at that time. Therefore, they were in a bit of a bind.
If they had done the appraisal immediately after inheriting the home, it would’ve been a better tax event for them. Nevertheless, Matt needed to figure out how to best get them out of that jam. So, he reached out to our Director of Tax Services, Corey Hulstein, to get his input. Corey shared with Matt that property tax assessment values are tangible and can hold up well. The caveat with that, though, is that the property tax value was still likely less than the true fair market value of the property at the time of inheritance.
But there was one other option for the client and her brother that Corey suggested to Matt. That was to get a written statement from a realtor with some sale comparisons around the time of the inheritance. While that holds less weight than property tax assessments, Corey has seen it used in similar situations. As long as the real estate professional isn’t a related party, Corey believes that could be a possible solution.
Being Proactive When You Inherit Real Estate or Assets
Of course, that situation is unique to the client and her brother. Still, we hope their example can help you gain more perspective on how taxes on inherited property can work. Keep in mind that this example was also about inheriting a family home rather than investment property. If you inherit investment property, do you still want to hold it as investment property? Or do you want to sell it and redeploy the proceeds? There’s a lot that goes into that decision as well. It’s yet another situation where the assistance of a financial professional can be a huge help.
Matt’s big takeaway from his client’s situation was the importance of being proactive when you come into an inheritance. If you don’t take the time to fully understand the situation at the time of the inheritance or leading up to it, it typically just gets that much more complicated.
Taxes on Inherited Property as It Relates to Your Financial Plan
If you’re inheriting real estate, there are tax implications just as there are with inheriting any large assets. Ask yourself, how can that impact your overall financial plan?
While Corey, Matt, and the rest of our team are happy to help answer questions that you may have about taxes on inherited property or other related topics, we’re also giving you the opportunity to possibly get those answers in just a few clicks. By clicking the “Start Planning” button below, you can use the same financial planning tool that our CERTIFIED FINANCIAL PLANNER™ Professionals use from the comfort of your own home.
With this financial planning tool, you can enter the values and information for multiple properties so you can begin to get a better picture of how inheriting a property could impact your financial plan. If you want to know more about how our financial planning tool works and/or have questions about taxes on inherited property, you can schedule a 20-minute “ask anything” session or complimentary consultation with one of our CERTIFIED FINANCIAL PLANNER™ Professionals. We can meet with you in person, virtually, or by phone—whatever works best for you.
Investment advisory services offered through Modern Wealth Management, Inc., an SEC Registered Investment Adviser.
The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Barber F