Who pays tax on the sale of inherited property

by Rob Seltzer, CPA, PFS

My wife and her sister inherited their father's home. They sold the house for less than its original purchase price. Will my wife owe taxes on her half of the sale?

The purchase price of the house is not relevant to whether taxes are owed. The computation is based on the fair market value of the property on the date of death. This becomes the basis. The gain or loss is then calculated based on comparing this amount with what the property is sold for. If the sales price is lower than the fair market value, then it is loss. If it is greater than it is a gain. The gain is reduced by any fixing up expenses that are incurred as well as sales costs such as commissions. The transaction is either a capital gain or loss. If it is held for more than one year, then it is considered a long term capital gain and will be taxed at more favorable rates. These rates differ based on what tax bracket you are in. If the holding period is less than a year, it is a short term gain and is taxed as ordinary income. If this transaction is a loss, it is limited to offset other capital gains or ordinary income of up to $3,000 per year. Any loss in excess of $3,000 gets carried forward indefinitely.

Rob Seltzer is principal of Robert Seltzer, CPA, PFS, in Beverly Hills. You can reach him at (310) 278-9944 or (310) 278-9944.

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