Several factors determine tax implications on selling inherited property
Tribune Content Agency
Q: My husband inherited his parents’ home about six years ago. We are in the process of selling it this year for more than $500,000. Our current income is less than $40,000. Do we pay capital gains on this property? If so, how much? How do we find a competent CPA or tax attorney? The sale will be in New York and we live in Georgia. A:
If your husband inherited the home six years ago, he inherited the home at its value at that time. So the good news is you shouldn’t think about having to pay taxes on the entire amount of the sale price. You need to figure out what the value was of the home at or around the time your husband inherited the home.
As you research home values, you might find that the home was worth around $400,000 at that time, so at most your profit would be around $100,000. We’re sure you will have expenses associated with the sale of the home: broker’s commission, settlement fees and other expenses. You might have even have had expenses to improve the home while you owned it for example: repairs on the roof, new hot water heaters and other items.
Many real estate brokers charge between 5 and 6 percent commission on the sale of a home. At around $25,000, along with other closing costs and some improvements to the home over the years, you might only have a “profit” of around $50,000 on the $500,000 sale. The first $450,000 wouldn’t have a tax and the other $50,000 would be taxed at long term capital gains rates of up to 20 percent. In your tax situation, your rate may be lower.
One complication you might have is if you rented the property over the last six years. Rental properties may cause your taxes to become even more complicated. When you rent a property, you are entitled to offset the income you get from rent with expenses such as real estate taxes, insurance, and maintenance cost.
You also get to depreciate the property. That depreciation may have given you some “tax losses” over some years and now that you are selling the property, the IRS will want to recapture that depreciation at a rate of up to 25 percent. So if you took around $50,000 in depreciation over the last five years or so, you might owe a tax of up to $12,500 in addition to any other taxes you might have to pay.
However, if your property has been rented for that time, you could defer paying any federal taxes on the sale of the property if you choose to sell this property and buy another like-kind income-producing real estate property. You can undertake a 1031 exchange under IRS code rules and defer paying taxes on the sale of the home.
We’ve made quite a number of assumptions but wanted to give you an idea of what you are up against. You also may have to consider New York tax rates and your own Georgia tax that may be owed.
So as far as finding someone to help you out, you might consider an Enrolled Agent. Enrolled Agents are federally licensed tax practitioners who specialize in taxation and can represent taxpayers before the IRS. You can find an enrolled agent near you by searching for one on the site for the National Association of Enrolled Agent NAEA.org . You also can ask some of your friends and relatives for a referral to a local accountant a CPA that has experience with the tax laws of different states and does extensive work in this area.
Again, depending on what the value of the home was when he inherited it, how you used it and how much “profit” is involved will dictate the type of person you need to help you out. If the value of the property was $600,000 and now it’s worth $500,000 and you didn’t rent the property, you may have no tax to pay to the IRS. But New York and Georgia may have other rules pertaining to this inheritance that could affect you. Good luck.
Ilyce Glink is the creator of an 18-part webinar+ebook series called “The Intentional Investor: How to be wildly successful in real estate,” as well as the author of many books on real estate. She also hosts the “Real Estate Minute,” on her YouTube channel. Samuel J. Tamkin is a Chicago-based real estate attorney.
Contact Ilyce and Sam through her website, ThinkGlink.com.
(c) 2016 Ilyce R. Glink and Samuel J. Tamkin. Distributed by Tribune Content Agency, LLC