When it comes to selling an inherited home, especially if it is out of state, consider how it will impact your taxes.
Q: We live in North Carolina but I also own a home in New York City with my four siblings. We inherited the home from our parents and now each of us own 1/5th of the home. We inherited the home 4 1/2 years ago.
Now that we are preparing to sell the home, how do we figure out what we will owe in taxes to New York, North Carolina and the federal government? Do we take the assessed value at the original transfer date and use that as the basis and only claim tax on 1/5 of that profit? Meaning the sale price minus the basis?
A: You’re right to focus on the “basis” of the home. The basis for IRS purposes takes into account all the costs of buying the home, the purchase price of the home, capital improvements made to the home while you owned it, the costs of selling the home, etc.
When you inherited the home from your parents, you inherited the home at its value at that specific time. Even if your parents paid close to nothing for the home, your “basis” is whatever the home’s market value was around the time you inherited the home. Frequently that window in determining the value can be up to one year following the date you inherited the property.
This means that you and your siblings may only be looking at having to pay federal income taxes at the capital gains rate for appreciation in the property for the last 4 years or so. It is of utmost importance that you research the value of the property at or around the time you inherited the home. That value is the key. If the property has not appreciated much in the last several years, you may have no profit in the sale. If it’s gone up quite a bit, you may have a higher federal income tax to pay.
Keep in mind that whatever the profit is from the sale, your profit will exclude capital expenses you may have incurred while you owned the home, costs of selling the home including brokerage commissions and closing costs, among many others. For IRS purposes, you are looking for the basis of the home: the value of the inherited home, plus costs to put acquire title in your name, plus capital expenses, and, finally, expenses of sale.
If you profit is low, you might only pay federal income taxes at a lower capital gains tax rate but if the sale causes you to jump up in tax brackets, your capital gains tax rate may be as high as 20 percent. Plus don’t forget that the sale may also cause you to pay the additional Medicare tax of 3.8 percent on the profits.
That can give you a brief synopsis of what your federal income tax situation might be. As far as local tax consequences, we’ll leave that to you and your tax preparer. Some states will tax you when you sell the property — that means that the state collects what it is owed at the time of the sale so there is no getting around paying the state taxes. Other states, will require you to file an income tax return and declare your income from the sale. And when it comes to some municipalities around the country, those municipalities may have their own taxes for you to pay.
You should know that when you sell the property, you will be required to give the settlement agent your social security number. The settlement agent will report the sale to the applicable government agencies and if you fail to file the proper returns, those agencies may sent you a notice to settle up with those states. Having said all that, you also live in North Carolina. If you file a tax return there, you may get offsetting credits for any taxes that you pay other states.
It gets complicated and for this reason our brief description should give you enough information to make sure you get competent tax preparation help when it comes time to file your tax returns.