Capital gains tax on inherited home only due when home sold

Question: Do I owe capital gains tax on the Florida condo my dad left to me in his will? He died a few months ago and his estate is being probated. Dad paid $42,000 for the house back in 1973. I haven’t had it appraised, but it has ocean access, and judging by the sales in the neighborhood, I am guessing it’s worth about $500,000 now. I don’t have much liquid cash, so I would have to sell the house just to raise the money to pay the taxes. This is a big concern for me because I was planning on living there.

Answer: My condolences on your father’s passing. To answer your question, let me start by explaining the capital gains tax. I think you may be under some misconceptions. Capital gains tax is not due when you the asset. It is due only when you the asset. So, until such time as you sell the house you are inheriting, capital gains will not be an issue for you.

Now let us take this a step further: under the federal tax code, when you inherit an asset from a decedent, you inherit it based on what it is worth at the time of the decedent’s death. This is called the “step up” in basis. Thus, even if you did sell the house, your capital gains tax would be calculated on the difference between what Joseph Karp

The Karp Law Firm, P.A. you sell the house for and the value at the time of your father’s death, not the original purchase price of $42,000. Obviously the step-up would mean a huge tax savings for you, if and when you choose to sell the condo.

The step up in basis and the associated tax savings apply only to inherited assets. Gifted assets retain the gift-giver’s original basis. That is why clients usually try to avoid making lifetime gifts of highly appreciated assets, but instead, do so through their wills or trusts.

Joseph Karp, a member of the Florida and New York Bars, is a Nationally and Florida Bar Certified Elder Law Attorney and founder of The Karp Law Firm, located in Palm Beach and St. Lucie counties. The firm assists clients with wills, trusts, Medicaid and VA benefits planning, asset preservation, probate/trust administration and estate litigation.