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Just Woke Up | Inherited and sold a house, do I pay income tax on this? |
A computerless friend of mine lost her parents this year and inherited her parents house throught a pre-signed quit claim deed. She has since sold the house and banked the money. Does she have to claim/pay taxes on the sale?
The house is in northern Michigan if that matters.
THANKS!
Additional Details
A friend told her that she DOESN'T have to pay a "income tax" on this sale because its not required on real estate up to $500,000. |
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muncie birder
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I am not a tax expert, but I do not think so. The cost basis of the house is what it was worth when she inherited it. That would fall under the heading of inheritance tax not income tax. There is a fairly large exemption for that, about 2 million if I recall correctly. If the house appreciated after she inherited it, there would be tax on that amount maybe. There has not be a lot of property appreciation lately. More depreciation. |
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bostonianinmo
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She may have a problem. A SERIOUS one.
If her parents quitclaimed the home to her, it's a gift and her basis in the home is whatever their basis was or the value at the time of the gift, whichever is lower. Compared to current housing prices, that might be VERY low if they purchased it a long time ago. In this case, she will have a tax liability. How much tax she owes will depend upon how long she owned the home and whether or not she lived in it as her principal residence while she owned it. You have not provided enough information to say how much the tax might be.
Had the home actually been transferred to her through the parents' estate(s), her basis would be whatever the value was on the date of the last parents death. She'd only owe taxes if she sold it for more than that value AND it would be treated as a long-term capital gain regardless of how long she owned it. The rate for long-term capital gains caps out at 15% and can be as low as 0%.
Edit: The friend may be right or may be wrong; there's not enough information to say.
If you sell your personal residence and owned and lived in it for at least 2 of the 5 years immediately prior to the sale you can exclude up to $250k in gain if single or $500k in gain if married filing jointly from any capital gains tax. If you don't meet the 2 year requirement then the entire gain is normally taxable. It's also taxable if you have used the exclusion within one year of using it on another residence. There a couple of exceptions that will give you a pro-rata exclusion, such as if the reason for the sale was a job change or an illness that forced you to sell your home. |
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mdcradd
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talk to an accountant or tax service |
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growing inside
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Yes. The $500,000 exemption applies only to a married couple selling the house they have lived in for atleast two years. |
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acmeraven
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She should determine what the dollar value of the property inherited was at the time she received it; courts do this under an inventory & appraisment which is standard. Inherited property sales are always classed as long term; if she sold it for more than it was worth at time of inheritance then she has long term capital gain; if she sold it for less than it was appraised for then she has long term capital loss which can be used to reduce other income and reduce her tax bite accordingly. |
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xtraheavy01
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Just Woke Up,
If her parents signed the deed over to her before they died, the property was gifted to her and her cost basis becomes the cost your parents originally paid for the house plus improvements in the house made by her parents,
Once the house was hers, she could consider it her principal residence and qualify for the 212 exclusion of $250,000 of gain being excluded as long as you live in it two out of 5 years up to the date of sale.
If she did not qualify for the exclusion, then there would be a gain on the sale of the house to report unless she chooses to reinvest those funds into another house. She has , I believe, 18 months to decide and do the purchase. This could postpone or possibly eliminate any capital gains.
I would suggest that she contacts a tax attorney to see if the pre-signed quitclaim is valid or whether there was an estate return required to be filed that included the house in the estate. |
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prescientone
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Bostonian is right on...there is also some issues on the table for passage for 2008 regarding treatment of real estate sales. We need more information...such as inherited or gifted....market value at date of gift...selling price of home...reportability, etc. If tax questions were simple, everyone would be answering |
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taxreff
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I'm afraid Boston's answer above is correct. Had your friend inherited the house she would have received a step-up in basis to fair market value. Since the home was gifted to her, however, her basis is whatever her parent's basis was.
That could result in a large taxable profit. Your friend needs to first determine what her parent's basis was. Assuming the house was never a rental or commercial property, the basis would be:
Purchase price + capital improvements = Basis.
As a possible loophole, if your friend lived in the home with her parents for 2 years before the sale and the quit-claim was signed at least 2 years before the sale, she could exclude up to $250K of gain ($500K if MFJ). |
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