What taxes do I pay if I sell a house below its basis

by Rob Seltzer, CPA, PFS

Q. I inherited the home I was living in with my mother when she passed in 2007. It was appraised for almost $900,000 at that time. I am now thinking of selling it. The listing price would be $788,000. Will there be a capital gains tax on the sale?

When someone dies, the inherited property gets what is known as a step-up in basis. For example, in your situation, it does not matter that hypothetically, your mother paid $200,000 for her home. Your cost basis would be the appraised value on the date of death, or $900,000. Let’s assume that you sell the home for the asking price of $788,000. You would then have closing costs that would increase your loss. Let’s assume that those closing costs would be $48,000, which would increase your capital loss from the $112,000 difference in basis and sales price to $160,000. You are allowed to use this loss to offset capital gain income in the future or concurrently. You are only allowed to deduct $3,000 in capital losses each year against ordinary income. The remainder gets carried forward indefinitely. So instead of paying a tax, this transaction would generate a capital loss that would provide you with some significant tax benefits.

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

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