Sooner or later, you may decide to sell property you inherited from a parent or other loved one. Whether the property is an investment, an antique, land, or something else, the sale may result in a taxable gain or loss. But how you calculate that gain or loss may surprise you.
When you sell property you purchased, you generally figure gain or loss by comparing the amount you receive in the sale transaction with your cost basis (as adjusted for certain items, such as depreciation, improvements and other items). You treat inherited property differently. Instead of cost, your basis in inherited property is generally its fair market value on the date of death or an alternate valuation date elected by the estate’s executor, generally six months after the date of death.
There are situations where special rules apply. For example if you inherited property from someone who died in 2010 or if you or your spouse gave the property to the decedent within one year before the decedent’s death, or if the inherited property was a farm or a closely held business. See Publication 551 for the complete rules regarding the basis for inherited property.
You should contact the executor of the estate or the personal representative of the estate to obtain the basis information.
The general basis rules for inherited property can greatly simplify matters, since old cost information can be difficult, if not impossible, to track down. Perhaps even more important, the ability to substitute a “stepped up” basis for the property’s cost can save you federal income taxes. Why? Because any increase in the property’s value that occurred before the date of death won’t be subject to capital gains tax.
For example: Assume your father left you stock he bought in 1990 for $10,000. At the time of his death, the shares were worth $50,000, and you recently sold them for $65,000. Your basis for purposes of calculating your capital gain is stepped up to $50,000. Because of the step-up, your capital gain on the sale is just $15,000 ($65,000 sale proceeds less $50,000 basis). The $40,000 increase in the value of the shares during your father’s lifetime is not subject to capital gains tax.
What happens if a property’s value on the date of death is less than its original purchase price? The basis must be lowered to the date-of-death value.
Holding Period For Inherited Property
Capital gains or losses resulting from the disposition of inherited property automatically are considered long-term, regardless of how long you or the decedent owned the property (see Publication 559). This presents a potential income tax advantage, since long-term capital gain is taxed at a lower rate than short-term capital gain.
You can find more details about the tax rules for the sale of inherited property on the IRS website.
If you have tax questions or need help with the preparation of your return give us a call!