Understanding Real Estate Inheritance and Its Value

Ever wondered about the tax implications of inheriting a property? If you're concerned about heavy tax burdens upon inheriting a home, you can often rely on the 'step-up basis' principle to lessen your financial strain.

The 'step-up basis' principle recalibrates the value of the inherited property, essentially resetting the value of the asset. For instance, consider Jack who bought a home in 1980 for $50,000. By 2019, Jack's demise leads to his daughter, Jill, inheriting the property, which by then has appreciated to a fair market value of $509,000.

So, does Jill have to pay capital gains tax on the property she inherited at her father's demise? No. While Jill inherits the asset's value at the time of her father's death, she doesn't owe anything until she disposes of the asset.

Fast forward to June 2023. The property value has escalated, and Jill decides to sell it for $679,000, realizing a gross profit of $170,000. After accounting for the selling expenses and any home improvements made, she ends up with a net profit of $115,000. The potential capital gains tax on this net profit depends on whether she used the home as her primary residence for two out of the past five years and possibly other qualifying conditions.

What if Jill had liquidated the property immediately upon inheritance? If she had sold the house soon after inheriting it and accounted for the selling costs, she might have avoided any capital gains tax and pocketed nearly the entire step-up basis value.

And what if she had disposed of the asset at a loss? Suppose Jill managed to sell the property for only $500,000 and incurred selling expenses of $40,000. In that case, she could declare a capital loss of $49,000.

This discussion doesn't cover all aspects related to inheriting properties, such as other estate taxes, trusts, and more, which need to be considered while planning an estate. Hence, my suggestion would be to consult an estate or trust attorney who can provide comprehensive information and answer any 'what if' queries you may have.

Looking for a referral? Don't hesitate to reach out to us today, and let's ensure your inheritance planning is a stress-free process.