Taxes on Sale of Inherited House

by Rob Seltzer, CPA, PFS

Q: I would like to sell an uninhabited house I inherited and to which I have made improvements. What would be my tax liabilities?

I assume you are talking about income tax liabilities, not any estate tax. The estate tax should already have been taken care of. In order to calculate the income taxes owed, you will need to calculate the gain or loss on sale. The first amount is the cost basis. You can obtain the cost basis from the estate tax return if one was filed. If not, your cost basis is the fair market value of the property on the date of death. You can also use what is known as the alternate date valuation, which would be the fair market value six months after the date of death. In order to have the smallest gain or largest loss possible, you want to use the date that has the higher value. From the sales price, you deduct the cost basis. In addition to deducting the cost basis, you also deduct the improvements you paid for as well as selling costs like real estate commissions. This is illustrated below:
  • Sales Price
  • Less cost basis
  • Less improvements
  • Less selling costs
  • Equals net gain or loss

You should report the gain or loss on Schedule D . The capital gain tax depends on what the rest of your return contains as well as how long you owned the property before selling. If you held the property for 365 days or less, you will be taxed on the gain at the same rate as the tax on your ordinary income. If you held the property 366 days or more, the tax on your gain will either be 5 percent, if you are in the lowest two tax brackets, or 15%, if you are in higher tax brackets. You will not owe a tax if you take a loss on the sale.

Rob Seltzer is principal of Robert Seltzer, CPA, PFS, in Beverly Hills.

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