Taxes on Selling Property That You Inherited

In most states and most situations, there's no tax when you inherit property. If you sell the property, however, you may have to pay capital gains tax on your profits

Capital Gains

Capital gains income on the sale of an asset is taxed differently from your regular income. That's not a bad thing, as capital gains rates are frequently lower than regular income tax rates. You figure taxable gains by subtracting your basis in the property from the sale price.

In most cases, the property basis is the purchase price. However, when you inherit property you get a break. Instead of inheriting the decedent's basis, you can use the fair market value at the time the owner passed on. For example, suppose your mother leaves you a house she bought for $75,000 that rose in value to $125,000 when she died. If you turn around and sell it at auction for $130,000, you pay tax on $5,000 rather than $55,000.

Capital Loss

If you sell inherited property for less than the basis, you have a capital loss. You can use this to reduce your capital gains income from other sales. For example, suppose you inherit a necklace appraised at $2,500, but when you sell it, it only brings $1,000. You can take the $1,500 loss and subtract it from the $5,000 gain on the inherited house, or from the capital gain on sales of property you bought yourself.

If your capital gains transactions for a year leave you with a net capital loss, you can deduct up to $3,000, at time of writing, from your non-capital income. If you're married filing separately, the deduction is $1,500. If your loss exceeds the limit, you have to carry over the remainder and subtract it next year. For example, if your net capital losses total $3,700 and you file a joint return, you write off $3,000 this year and have $700 in losses you can deploy next year.

Filing the Paperwork

You report all your capital gains sales for the year on Form 8949 and Schedule D. Use 8949 to list the nitty-gritty details such as when you acquired the property, when you sold it, the basis and the gain on the sale. On Schedule D you list the total gain or loss from each capital gain transaction and the net result. Report your net gain or loss on your Form 1040 and follow the IRS instructions for calculating and reporting any capital gains tax.