Inheriting property can be a wonderful gift from a loved one, but it comes with a significant drawback – you’re in the sights of the Internal Revenue Service (IRS).
Taxes like capital gains and the estate and inheritance levy become an immediate issue.
It is essential you receive professional advice to ensure you abide by the laws of the land, while at the same time, not paying any more than you should.
Here are some basic observations if you find yourself in this situation.
Firstly, you will only pay capital gains tax if you sell the property. And it will be calculated based on its original purchase cost and the price you sell for unless you sell immediately (see below).
So, at least to this extent, you don’t have to panic the moment you inherit.
Here are a few strategies for avoiding capital gains tax.
Move in and make it your home – If you make it your primary residence, and decide to sell in a few years, your tax liability will be reduced by $250,000, or double that if you have a spouse.
What is a primary residence? – The IRS has some rules. It is where you live most of the year. It’s the address you use for your tax returns and to receive mail. It should also be used for your voter registration card and driver’s license.
Residence qualification period – You’ve got to stay in the home – your new primary residence – for at least two of the five years before you sell it.
Your current property – Your existing home can be sold as normal, or you could rent it out. The latter option requires professional advice so you understand the full financial and tax implications of renting out your home.
Sell immediately – The IRS will calculate the value of the home on the day you inherit, so if you put it on the market quickly, there’ll be next to no tax burden on you. If you have joint ownership, you will need a quick agreement with all parties. Again, seek professional advice to ensure you abide by the tax regulations.
Give it away – You may transfer the property to a son or daughter. However, you’ll only place the tax implications on their shoulders. It might still be a valid decision, but be aware it won’t stop the IRS circling. Also, the US has a gift tax and you might become subject to it by exceeding its limit.
Exchange deal – Under Section 1031 of the Internal Revenue Code, tax payment is deferred if you exchange it for a similar property. However, there are many stipulations surrounding this strategy. Seek professional advice to learn more.
NOTE: The information in this article is general in nature and provided as a market overview only. Always consult your financial advisor or accountant for advice specific to your personal circumstances.