Q: I have enjoyed reading your column in the Baltimore Sun. If a home has been left to the children after parent’s death are there income taxes due? Do we have to pay inheritance taxes?
In my case, the death of one parent was 20 years before the other. What determines the value of the property and the amount of taxes we may owe? Thanks for your advice.
A: When someone dies, all of the assets he or she has accumulated in life and has at the time of his or her death move into the estate. If the person worked for half of the year, income tax would be due on the income that was earned. If that person held a full-time job, it’s probable that there may be some overpayment of tax, since the withholdings would have been calculated on a full year of income, not just a half (or whatever portion the individual worked).
When it comes to heirs, there is no income tax to pay on an inheritance. The only exception would be if you inherited a tax-deferred retirement account, such as a 401(k) or IRA. You would move that money into an “inherited IRA” and as you withdraw cash from the account (the minimum withdrawals are dictated by life expectancy timetables) you would pay income taxes on the cash.
In general, it’s the estate that pays any taxes that are owed on the assets. But most Americans don’t pass down enough to trigger inheritance taxes. Through the end of 2008, an individual is allowed to pass down $2 million in cash, assets, and property tax-free. In 2009, that jumps up to $3.5 million, and in 2010 all assets may be passed down tax free. (It reverts to $1 million in 2011, although it’s likely Congress will fix this in the coming election cycle.)
When it comes to property left to an heir, if the total value of the estate is less than $2 million, there are no estate taxes to pay. If the estate exceeds $2 million, you may have to pay a steep inheritance tax on any assets above $2 million.
Let’s talk about your situation: When your Dad (I’m going to assume your Dad passed first) died 20 years ago, your mom would have inherited the whole property. Or, if it was held as joint tenants with rights of survivorship, she’d have received the entire property anyway.
When your mom died, you inherited the property at its current market value. If they bought it for $100,000 and the house was worth $500,000 when your mom died, you would inherit the house at its current market value on the day of her death. If you turn around and sell the house for $500,000 you would owe no tax on the proceeds of the sale.
Since your mom can pass down $2 million tax free, you don’t need to worry about this. If the estate is worth more than that, then the estate would pay inheritance tax on any assets exceeding $2 million. For more details, please consult with an estate attorney.