HEADACHE OR BLESSING? INHERITING PROPERTY:
Heirs must pay taxes on assets they inherit --- minus funeral expenses
Mark Mikesell got his lucky break five years ago — so it seemed — after learning that he and his 12-year-old brother were named heirs to their great grandfather’s estate.
The windfall could not have come at a better time. He was 24 years old then, recently married with a newborn son. His great grandfather’s will entitled him and his younger brother to split $250,000 in cash. They also gained ownership of six vacant lots in Esplen, in city’s west end.
“Money was tight at that time,” he said.
In his haste to liquidate the six properties and divide the proceeds between himself and his minor brother, Mr. Mikesell paid a processing fee to convert the properties into his name prior to the estate being settled.
But when he attempted to sell the parcels, he got a rude shock. He found out the vacant lots were saddled with more than $50,000 in back taxes.
Part of his inheritance had become a serious burden.
Like many people who inherit real estate following the death of a loved one, Mr. Mikesell was not prepared for the surprises that popped up.
When it comes to a surviving spouse who inherits property, the legal transfer of real estate should occur relatively quickly and without tax penalties. But receiving inherited real estate in many other circumstances can be a complicated process that could take the executor of the estate and the courts months to sort out.
In any given year, about 7,000 estates are opened in Allegheny County as a result of someone passing away who owned property. The majority involve the transfer of real estate, although the county does not specifically track how many houses, vehicles, bank accounts, or how much in stocks and bonds are distributed to heirs.
The total dollar amount of the assets changing hands is substantial. Allegheny County collected a total of $123 million in inheritance taxes last year on behalf of the commonwealth.
Heirs are required to pay a tax on assets they inherit, minus expenses that could include the decedent’s funeral, flowers, luncheon and tombstone. The inheritance tax also would be minus any debt left by the decedent, including medical bills, mortgages and settlement costs for selling a home.
The inheritance tax rate in Pennsylvania depends on the heir’s relationship to the decedent. Children of the decedent pay a rate of 4.5 percent; siblings pay a 12 percent rate and collateral heirs — aunts, uncles, cousins and friends — owe a tax rate of 15 percent on the value of all inherited assets, except life insurance.
Watch out for back taxes
Had Mr. Mikesell researched the property passed down by his great-grandfather before having it transferred to his own name, he could have made a case that the vacant lots did not belong to him and that he owed no money for past real estate taxes.
If he waited for the estate to settle, the estate would have paid the debt with whatever cash his great-grandfather left.
But after the properties transferred to his name, Mr. Mikesell was solely responsible for the back taxes.
“If I had it to do all over again, I would have done more research,” he said. “I could have been more patient and let the estate deal with those properties. But I was a 24-year-old kid looking at a big paycheck and I got anxious.”
For four years from the time he inherited the properties, he lived in regret.
“There wasn’t a day during