Capital Gains on Inherited Property

Eric Reed   Tue, October 26, 2021

Inheritance can make your taxes tricky. If you inherit property or assets, as opposed to cash, you generally don’t owe taxes until you sell those assets. These capital gains taxes are then calculated using what’s known as a stepped-up cost basis. This means that you pay taxes only on appreciation that occurs after you inherit the property. A financial advisor could help ensure that you are filing your returns correctly. Let’s break down how capital gains are taxed on inherited property.

If You Inherit Property You Don’t Pay Taxes Automatically

There are three main types of taxes that cover inheritances:

Inheritance taxes – These are taxes that an heir pays on the value of an estate that they inherit. There are no federal inheritance taxes and only six states levy any form of inheritance tax. Given the state-specific nature of inheritance taxes, this subject is beyond the scope of this article.

Estate taxes – These are taxes paid out of the estate itself before anyone inherits from it. The estate tax has a minimum threshold. In 2021 that threshold was $11.7 million. As with all other tax brackets the government only taxes the amount which exceeds this minimum threshold, meaning that if your estate is worth $11,700,001, the government will levy taxes on $1. The remainder passes tax free.

Capital gains taxes – These are taxes paid on the appreciation of any assets that an heir inherits through an estate. They are only levied when you sell the assets for gain, not when you inherit.

Cash that you inherit is taxed through either inheritance taxes (when applicable) or through estate taxes. In the case of inheritance taxes, it is your responsibility to file and pay this tax. In the case of an estate tax, the IRS taxes the estate directly. As a result it is uncommon for an heir to owe any taxes, including income tax, on inherited cash.

The IRS does not automatically tax any other forms of property that you might inherit. This means that if you inherit property, stocks or any other form of asset, you generally will not owe taxes when you inherit. For example if you inherit your grandparents’ house, the IRS will not tax you on the value of the property when you receive it. (There are exceptions to this rule in certain specific circumstances. Most often these exceptions apply to assets that generate revenue, such as income investments, retirement accounts or ongoing businesses.)

You will, however, owe capital gains taxes if you choose to sell this property.

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https://finance.yahoo.com/news/capital-gains-inherited-property-164546562.html