Inheritance Tax Law on Houses

The inheritance tax question can be simple one!
What taxes will I owe when I sell an inherited house?

Let me start out by saying, I’m not a tax professional and I don’t play one on TV. Verify all information you get from this website and others, with a tax professional. With that being said, the inheritance tax law on houses when it comes to the selling of real estate, is straightforward. The short answer is that there aren’t any taxes owed.  The long answer is that it depends.

 Inheritance Tax Law – Short Answer

Most of the time, no inheritance taxes are owed.
The Short Answer on inheritance tax is NONE

The short answer is valid with these basic rules.

  • You sold the property at market value and you didn’t fix up the property after their death.
  • The estate is not worth more than 5 Million dollars
  • You got an appraisal that shows the market value

Any tax that would be owed, would only be owed on increased value of the property when you sold it compared to when the person passed away. If you sell the house quickly and do so without fixing up the house, then it has no time to appreciate or increase in value.  This causes for all of the property to pass to its heirs, tax free.  It’s one of the few pieces of tax legislation that is actually pretty cool and allows for real wealth to be built up from one generation, and passed on to the next.  

Even if you feel the appraisal isn’t necessary, it can help your tax records when you the sell the property, if you ever get audited.  Keep in mind that an appraisal is a best effort value of the house provided by another human. None of the appraisals take into account what I call the “hassle factor”.  In most cases, you will get an appraisal that is more than what you can actually get for the house.  There are a lot of reasons for this but most of it is due to the fact that the appraiser’s job isn’t to think about what buyers really want.  Buyers really want updated houses that are issue free.  If you sell the property “as is”, which helps you avoid taxes, then you are going to be selling a house the likely needs a lot of updating and repairs.  These issues will increase the time the house sits on the market as you will need to find that “perfect” buyer for the house which is a much smaller pool of potential buyers.

Inheritance Tax Law – Long Answer

Tax Inheritance Law can also be complicated.
As with any tax situation, it depends.

The long answer is needed because tax law is complicated and if your situation doesn’t fall into the nice simple situation, then you will really need to talk to tax professional to determine how much in taxes you will owe.  Here are several different tax situations that most people fall into.

Inheritance Tax Law – Rented the House for Several Years

In this situation, you inherited the house and decided it would make a good investment so you rented it out for some period of time.  During that time, you also made some improvements to the property so that it could be rented comfortable.  You enjoyed the cash flow and then after several years, decide you want to sell the house.  In this situation, you will need to pay taxes on the different between the value of the property when you inherited it, and the value that you sold it for.  The good news is that if you held onto the house for longer than 12 months, this difference will be taxed at long term capital gains.  The bad news, is that you will owe taxes.  The other good news, is that you won’t have to pay taxes on the value of the house when you inherited it.

Inheritance Tax Law – Fixed up the Property

For this situation, you decided to fix up the house and sell it for maximum value.  If you go this route, then you will have to pay taxes on the increased value minus the amount of money you put into the property.  The good news is that if you have the money to fix up the property, it will allow you get the maximum value.  The bad news is that if you sell the property within 12  months from when you bought it, it will get taxed at short term capital gains which can severely impact the benefit of fixing up the property in the first place.  Each person has their own situation and they just need to decide on the “hassle factor” for themselves and determine if this is something they want to take on.

Inheritance Tax Law – Vacant House

If you decide to do nothing from some period of time because you believe the the market is good and the house will continue to appreciate, you could still owe taxes.  This again comes down to the value of the property when you inherited it, vs what the property is worth when you sell it.  Just because you didn’t put any money into the property, doesn’t remove the tax issue.  If the market does appreciate, then you will either have to owe short term, or long term capital gains.  It just depends on how long you held the property.  If you held it for less than 12 months and the property is worth more now, then you short term capital gains.  If you held it for more than 12 months, then you owe short term capital gains on the amount the property increased in value.

Inheritance Tax Law – Wealthy Estate

If the person who passed away, is leaving an estate of more than $5,490,000, then there will be plenty of taxes owed and you must talk to a tax professional for some tax strategy and planning.

Inheritance Tax Law – Summary

Most people immediately start thinking of tax issues when they inherit a house.  For most of us, the house or property can pass to the estate without any taxes and if they do hold on to it, minimal taxes are owed on just the increase in value of the house.  That should help to ease the mind of anybody in this situation.  It can be especially beneficial to those houses that were bought in estates for a long time and have significantly increased over the years they have owned the house.