After losing a loved one, you may stand to inherit property from their estate. If you do, remember that you may end up facing taxes if you sell that property. Those taxes are called capital gains taxes, and they can be complex.
Capital gains taxes are paid on the value of the home at the time of your loved one’s death. So, if your home was worth $500,000 when they passed away, you should be prepared to cover taxes after selling the property if it sells for more than that amount. This is called a “stepped-up” basis for paying taxes on the home.
How much will you owe if you sell an inherited property?
If you inherit a property worth $500,000 and sell it for $600,000, you will need to pay taxes on the $100,000 in gains. If you sell it for less than $500,000, then you can deduct your losses (up to a certain amount) each year.
There are ways to reduce the capital gains taxes, too. Updating the property will help you reduce the capital gains taxes by the amount you spent. So, if you spend $50,000 updating the property and sell it for $600,000, only the $50,000 in gains would be taxed. That’s a significant difference to consider.
Are there other ways to avoid capital gains taxes?
There could be. Owning and living in your property for a certain length of time, making it your primary residence, is one possibility.
There may be other tax breaks as well, which is why it’s a good idea to get to know the country’s tax laws and to take steps to reduce your potential capital gains however you can. By doing this, you may find that you can pay much less in capital gains so that you can benefit more from the sale of your loved one’s asset.
If you have not yet inherited the property and know you will in the future, there could be steps your loved one could take now to reduce your potential taxes, too. It’s the right choice to look into the law before you decide to sell the property.