How is capital gains tax paid on an inherited property?
Do I have to pay capital gains tax on an inherited property? Hi, it’s Nick with Sell My San Antonio House. Now, if you’ve inherited a property and you’re thinking about selling it but you’re worried about if you’re going to have to pay taxes on the value of that property when you sell it, great question. We’ve bought a lot of inherited properties, so we’ve come across this situation a lot. Now, I am not an accountant, and I’m not your accountant so I can’t give you tax advice, but I can help you get really close to the answer to this question.
So, when you inherit a property and you’re thinking about selling it, well, now, all this money is going to come in. And often people say, “Well, am I going to have to pay capital gains tax on this?” Well, it depends on what you do. So capital gains tax is basically a tax on an asset, property, or it could be a stock. If you buy something and then you sell it for more, you pay tax on the difference. So if you bought a stock for $10 a share and sell it for $20 a share, you pay tax on the difference. The same thing can happen with houses.
It’s based on what’s called the basis. So the basis is pretty much your purchase price for the property, and there can be some other improvements and fees included in that, but you take that and then what you sell it for, and you pay tax on the difference. With inherited property though, you didn’t buy that property. Somebody else bought that property, and that property was given to you or you acquired it through inheritance. So in that case, what you’re eligible for is what’s called a stepped-up basis.
What does that mean? That means if, say, grandma purchases property in 1903 for $25,000, you don’t have a basis of $25,000. You have a stepped-up basis, which is the value of the property at the time you acquired it. So at the time, you inherited it. So if you inherited it years, years, years, years, years later and at the time it’s worth $100,000, then that’s your starting point or your basis. So if you sell it, you could be looking at paying capital gains tax on the difference. So, an easy way to avoid paying the capital gains tax on inherited property is to sell it for less than your basis or the same amount as what your basis is going to be because then there is no gain to have a capital gain tax on.
So to recap, when you inherit it, that’s going to be your new basis. So let’s call that number $100,000. And if you sell it for 100,000, there’s not a tax to pay on that. There’s not a capital gain there. Now, what if you sell it for less than that amount? Then you can actually take it as a loss and use that as a deduction on your taxes. There’s a certain amount you can deduct every year. But I have seen people who sold it for less than what was stated as the value at the time they inherited it, and then they took that loss over the next few years as a deduction on their taxes.
So if you’re looking to sell an inherited property, you’re concerned about the tax you’ll have to pay on it, the capital gains tax may not be something that you’re going to run into. If it is, there are some options for how to lessen that tax burden that’s going to come with selling your inherited property. If there’s anything we can do to help you out, please give us a call (210) 201-6644, or reach out through the website, sellmysanantoniohouse.com. Thank you.