Receiving a home as an inheritance implies the payment of taxes or, at least, the declaration of the property, as it is added as an increase in your estate. Even more, when this implies the sale of the inherited property. In this case, you will probably have to pay taxes to the Treasury according to the profits obtained by the transaction.
If you want to know how to report this sale in your taxes, you must first have the calculation of your profit or loss; this digit would be the result of the amount you received for the amount you inherited. If you made it again in this process, you would need to report it on your taxes using Form 8949 and Schedule D.
Do I have to report the sale of inherited property?
Yes. Gains and losses from an inherited homestead are reported annually by completing Form 8949 and Schedule D. Through the former, the disposition of the property is reported as the description of the assets, date of acquisition and sale. Schedule D reports capital gains or losses on the sale.
Again, also known as a “step- up in basis“, translates as an increase in the estate and is filed through the estate’s executor. To make this scenario a little more graphic, we will leave an example on the following lines:
The owner of the property bought it 15 years ago for $500,000. Currently, the house has increased its market value to $1,500,000. The owner dies, and the children inherit the place and decide to sell it at fair market value, i.e., $1,500,000.
If the heirs sell the house at fair market value, they will pay no taxes. But, if they sell it for $1,700,000, they will pay tax on the increase in equity for this $200,000.
Calculate capital gains or losses
The first step in determining whether you will pay a tax is to know if this property represents a gain or loss in your income. Here are the steps:
Step One: Talk to the executor of the estate
To find out if the sale of your property involves a tax, you need to know your basis in the property. This means that the executor must notify you of the property’s value on the day of the owner’s death.
If the executor filed an estate tax return, they would use the amount shown on this report as the basis. If you provide a valuation date other than the date of death, you must use the date of death to match the tax return.
IMPORTANT: If the legatee filed an estate tax return, you could only use an alternate valuation date. Otherwise, you must use the property’s value on the date of death.
Step Two: Determine the fair market value
As previously stated, if the representative does not file an estate tax return, the property’s fair market value is its amount on the day of the owner’s death. This figure should be included in the estate records.
When the executor cannot state the fair market value of the property as of the date of death, talk to an estate attorney who can determine the correct amount.
Step Three: Include improvement costs in the basis.
If the heirs made improvements to the home, they should include these costs in the basis and all expenses and fees related to the sale as part of the basis and real estate commissions.
Step Four: Compare prices
Once all these numbers are clear, it is time to compare and determine if there will be a profit or loss on the sale. These are taxed as follows:
- Losses: these are deductible according to capital gains. That is gains on investments, assets or other properties. If you do not have any income, you do not need to declare capital loss in your taxes
- Gains: These must be declared and are taxable as an increase in your wealth
Complete form 8949
Download the form from the official IRS website; you can also access it by clicking on this link https://www.irs.gov/forms-pubs/about-form-8949 and follow these instructions to fill out the document:
Categorize the home as a long term asset
The form separates short-term assets, i.e., those used less than 365 days of the year, with long-term support, which exceeds 366 days. No matter how long you have owned property, it always falls into the long-term category.
Long-term assets are found in Part II of the form. Ignore Part I. Check box F to report that you are writing a sale of a long-term investment not reported on Form 1099-B.
Complete the inherited property information
The Part II table is made up of eight lettered columns. In each, you should include the following information about your home, but the most important is the next six:
- Column A: Describe the property. Here you should include the street address
- Column B: Date you received the parcel in month/day/year format. This is when the owner officially transferred the property to you, not the date of death
- Column C: Date when the property sale was completed in month/day/year format
- Column D: Amount received from the sale of the home
- Column E: Amount of the total basis of the property, i.e., the fair market value on the date of death plus the amount of the home improvement expenses
- Column H: Subtract the amount in Column D from Column E, and this is the gain or loss number, and enter it in this box. If it is a loss, enter it as a negative value
Complete Schedule D
Download Schedule D from the official IRS website; also with this link https://www.irs.gov/forms-pubs/about-schedule-d-form-1040 and follow these steps to complete the document:
Enter Form 8949 totals
In Part II of Schedule D, transcribe the results of Form 8949 on line 10. Lines 11 through 14 probably do not apply to you, especially when the sale of this inherited property is the only transaction you are reporting.
On line 15, enter the resulting gain or loss in column H of the form. If you have negative and positive numbers, subtract the negatives from the positives.
Report your gain or loss on Part III of Schedule D Copy your net gain or loss on the line that applies to the tax return. In 2019, net gains on a long-term asset were taxed at 5% if in two lower tax brackets. Also, at 15% if in two higher tax brackets.