Capital gains rate on sale of inherited home

[Camas Lilly]

If I keep our taxable income below the 15% capital gains tax level, and if cash I receive from sale of inherited home is not considered income, do I have to pay 15% capital gains tax on that portion of the money that is considered gains?

 

[RunningBum]

That 15% level ($40,400 for singles, $80,800 for MFJ) is income + CG + Divs. Run it through a tax program and online estimator to see for yourself.

Don't forget you get a reset of basis on inherited assets.

 

[Bamaman]

If you have inherited a home, get a certified appraisal done immediately. You want to be able to reset the "basis" for tax purposes when the home is sold.

 

[Camas Lilly]

That 15% level ($40,400 for singles, $80,800 for MFJ) is income + CG + Divs. Run it through a tax program and online estimator to see for yourself.

Don't forget you get a reset of basis on inherited assets.

The cash is on the way. Split between two other siblings.

I believe I can keep our taxable income below $80,800. We were right at that point last year and I haven't taken all of our draws for the year, so that is very doable. Then I am thinking I won't have to pay 15% on that money if I don' t take the rest of our draw.

 

[Camas Lilly]

If you have inherited a home, get a certified appraisal done immediately. You want to be able to reset the "basis" for tax purposes when the home is sold.

It was appraised and already sold. I believe I am looking at about $208,000 above the "basis".

What do you mean by "reset"?

 

[jazz4cash]

Reset means the basis is adjusted (reset) to the Value at the time you inherited. Cap gain amount is difference between sale price and the adjusted basis.

 

[GalaxyBoy]

When I sold my late father’s house it was technically sold by the estate, not by me (I was executor), and the proceeds were thrown in with the other assets of the estate. Therefore the heirs had no capital gains from the sale. The house sold quickly so its value at the date of death was taken to be equal to the sales price and the estate had no capital gain.

Your situation will vary; I’m just throwing this out. It sounds like you and your siblings inherited ownership of the house and now the group is selling it, which would be different. It sounds like there are relevant details that haven’t been described.

 

[Camas Lilly]

When I sold my late father’s house it was technically sold by the estate, not by me (I was executor), and the proceeds were thrown in with the other assets of the estate. Therefore the heirs had no capital gains from the sale. The house sold quickly so its value at the date of death was taken to be equal to the sales price and the estate had no capital gain.

Your situation will vary; I’m just throwing this out. It sounds like you and your siblings inherited ownership of the house and now the group is selling it, which would be different. It sounds like there are relevant details that haven’t been described.

Yes, it has been 11 years and sister formed a LLC to hold the house between us. The LLC is being dissolved and sister is buying me out.

 

[Gill]

Are you sure you know the correct basis of the property? What the original owner paid for it is irrelevant. You need to know the market value at the date of death combined with any capital improvements you have made since then. You can also add to that any expenses of selling the property. There may not be as much gain as you think.
Gill

 

[Luvtoride]

All very valid points. We dealt with the sale of my mom's house last year during Covid and it sold within 6 months of her death. The IRS will consider the inherited basis of the house the sale price if sold within a year of death (as I was told by my Brother in Law who is an attorney/ CPA and works with clients on these types of issues all the time). Therefore, there should be no GAIN on the sale of the home to worry about taxes on.

 

[OldShooter]

I'll chime in as I often do: SGOTI is not a tax expert, does not know your circumstances, and is probably in another state from the one where you pay taxes. (Our state income tax has no special provisions for capital gains, for example) Hire a good CPA for at least an hour review and advice on the situation. CPA, not someone who has been through a storefront tax preparer's training.

 

[Camas Lilly]

Are you sure you know the correct basis of the property? What the original owner paid for it is irrelevant. You need to know the market value at the date of death combined with any capital improvements you have made since then. You can also add to that any expenses of selling the property. There may not be as much gain as you think.
Gill

Yes, the value at time of death was around $50,000. Sister made most of the improvements, taking payment in share ownership, so she really owns most of the home out of the three of us. My share is going to be $208,000

 

[Camas Lilly]

I'll chime in as I often do: SGOTI is not a tax expert, does not know your circumstances, and is probably in another state from the one where you pay taxes. (Our state income tax has no special provisions for capital gains, for example) Hire a good CPA for at least an hour review and advice on the situation. CPA, not someone who has been through a storefront tax preparer's training.

Advice well taken. Was already thinking about it.

 

[Camas Lilly]

Thanks. I think I am going to go ahead and hire a CPA. Doesn't seem to be the simplest of answers.

 

[cathy63]

If I keep our taxable income below the 15% capital gains tax level, and if cash I receive from sale of inherited home is not considered income, do I have to pay 15% capital gains tax on that portion of the money that is considered gains?

If you believe that you will have $208K in long term capital gains this year, then yes, you need to pay ~15% of that amount in estimated taxes. This would mean that the value of the home increased by at least $618K since the date of death and the gain is being split three ways. As we said in a previous thread, you will get a K1 from the LLC that tells you exactly how much of the cash you receive from the sale is capital gain and how much is return of basis.

You might actually owe a bit less than 15% though. It depends on all your other income, whether you are married, and if you take the standard deduction; but 15% is a reasonable estimate and if you over pay, you'll get a refund when you file next April.

Since this money is arriving in Q3 or Q4, make sure you keep good documentation showing the date that you received the funds. When you first do your taxes, they will probably show that a penalty is due because you didn't pay equally throughout the year. However, you can use IRS Form 2210 to show that your income was received unequally throughout the year and you did pay the tax due in a timely fashion.

 

[Camas Lilly]

If you believe that you will have $208K in long term capital gains this year, then yes, you need to pay ~15% of that amount in estimated taxes. This would mean that the value of the home increased by at least $618K since the date of death and the gain is being split three ways. As we said in a previous thread, you will get a K1 from the LLC that tells you exactly how much of the cash you receive from the sale is capital gain and how much is return of basis.

You might actually owe a bit less than 15% though. It depends on all your other income, whether you are married, and if you take the standard deduction; but 15% is a reasonable estimate and if you over pay, you'll get a refund when you file next April.

Since this money is arriving in Q3 or Q4, make sure you keep good documentation showing the date that you received the funds. When you first do your taxes, they will probably show that a penalty is due because you didn't pay equally throughout the year. However, you can use IRS Form 2210 to show that your income was received unequally throughout the year and you did pay the tax due in a timely fashion.

Thank you!

 

[Gill]

If you believe that you will have $208K in long term capital gains this year

I interpreted her statement to mean total proceeds of $208,000, not a gain of that much.
Gill

 

[Camas Lilly]

I interpreted her statement to mean total proceeds of $208,000, not a gain of that much.
Gill

That is correct, thank you.

 

[Gill]

That is correct, thank you.

Do you know how much of that is gain?
Gill

 

[cathy63]

Do you know how much of that is gain?
Gill

This is a complicated situation that involves the dissolution of an LLC and it's very unclear how much of that is gain. There's more of the backstory here: https://www.early-retirement.org/fo...e-taxes-on-sale-of-inherited-home-109727.html

 

[Camas Lilly]

This is a complicated situation that involves the dissolution of an LLC and it's very unclear how much of that is gain. There's more of the backstory here: https://www.early-retirement.org/fo...e-taxes-on-sale-of-inherited-home-109727.html

Thank you. I think the short answer I am looking for is my capital gains tax rate is 0% if I keep my income under the $80,800, and if this cash is not considered "income" because it is inherited, I am thinking I wouldn't be paying capital gains tax then?

 

[RunningBum]

Thank you. I think the short answer I am looking for is my capital gains tax rate is 0% if I keep my income under the $80,800, and if this cash is not considered "income" because it is inherited, I am thinking I wouldn't be paying capital gains tax then?

No, you don't get unlimited 0% capital gains, as I explained earlier. You've already decided to hire a professional, you should just do that rather than guess incorrectly.

 

[Camas Lilly]

No, you don't get unlimited 0% capital gains, as I explained earlier. You've already decided to hire a professional, you should just do that rather than guess incorrectly.

Thank you. I knew it wasn't going to be that simple.

 

[Gill]

Thank you. I think the short answer I am looking for is my capital gains tax rate is 0% if I keep my income under the $80,800, and if this cash is not considered "income" because it is inherited, I am thinking I wouldn't be paying capital gains tax then?

The fact that it is inherited is irrelevant. You're dealing with a potential capital gain which is the difference between the selling price of your interest and the basis of your interest. As has been pointed out, it is crucial to determine your basis which is likely impacted by the death of the previous owner combined with capital imrovements since that date.
Gill

 

[cathy63]

Thank you. I think the short answer I am looking for is my capital gains tax rate is 0% if I keep my income under the $80,800, and if this cash is not considered "income" because it is inherited, I am thinking I wouldn't be paying capital gains tax then?

No. Your inheritance was 1/3 of the $50K house that was originally handed over to the LLC; so ~$17K. That's the only part of the money that's tax free now. Everything else is an increase in value that happened after you inherited the house, so it's taxable.

So yes, you are going to owe long term capital gains tax on $208K-$17K=$191K. Some of that might fall in your 0% bracket, but obviously most of it is going to be in the 15% bracket. There might also be a small amount (less than $17K) of ordinary income in there if the LLC depreciated the buildings while it owned them, and that would be taxed at your marginal rate of 12% instead of 15%, but you won't know the exact numbers until you get your K-1 next year.