The tax consequences when selling a house inherited in Tampa can be hard to understand and untangle much of the time.
The relevant laws may seem fairly simple at first glance, but they get complicated when you factor in all the legal conditions and nuances. The short version is that if you made gains, you’ll owe taxes, and if you had a loss, you may have a tax deduction.
But then it gets complicated because whether you made a profit or had a loss also depends on when the decedent died and the use you made of the house.
Inheriting a house in Tampa can be both a blessing and a challenge, especially when it comes to understanding the tax implications of selling the property. At Cash Home Buyer Florida, we understand that navigating these tax consequences can be complex, so we’re here to provide you with a clear overview.
What Are the Tax Consequences When Selling a House Inherited in Tampa?
Capital Gains or Losses Taxes
The tax consequences when selling a house inherited in Tampa include being subject to capital gains taxes. Capital gains or losses are those that stem from the sale of items you use for personal or investment purposes, such as stocks or a house. So for income tax purposes, the sale of an inherited house in Tampa is treated as a capital gain or loss.
The capital gain is the difference between the selling price of the property and its “basis” (the value used to calculate gains or losses). If you sell the house for more than its basis, you will realize a capital gain, which may be subject to taxation. Conversely, if you sell the house for less than its basis, you may incur a capital loss, which could also have tax implications.
The catch with selling an inherited house is that a gain or loss is considered a long-term gain or loss. Further, losses on personal property cannot be claimed as a tax deduction. So if you ever used the inherited house as your personal home, it became personal property, and you can’t deduct a loss if you sell it.
Reporting the Inherited House
In some cases, the executor has to file an estate tax return to report the inherited house. But this is only if the estate exceeds the inflation-adjusted exemption amount.
The “basis” of the house is crucial in determining your tax liability. For inherited property, the basis is typically the fair market value (FMV) of the property on the date of the decedent’s death. This means that the capital gains taxes you owe are calculated based on the difference between the selling price and the FMV at the time of the decedent’s death, not the original purchase price paid by the decedent.
The determination of the gain or loss on a house sale depends on the “basis” of the house. As the basis goes higher, the taxable gain from a sale decreases. There are, however, different rules for the sale of an inherited house that allow for a special stepped-up basis.
In certain cases, the executor of the estate must file an estate tax return to report the inherited house. This requirement depends on whether the estate exceeds the inflation-adjusted exemption amount, which varies from year to year. The estate tax return is generally necessary if the total value of the estate, including the house, surpasses the exemption threshold set by the IRS.
“Basis” Determination
The basis of the house depends largely on when it was inherited. In general, the basis is the fair market value on the date of the decedent’s death. What this means is that the capital gains taxes you owe are based on gains above the property value at the time of the decedent’s death – not what the decedent paid for the house.
If you never lived in the house and if it sells for less than what the fair market value was at the time of death, then you have a deductible loss. Just be aware that only $3,000 of such losses can be deducted each year against your ordinary income. Anything above that $3,000 will have to be carried over as deductions in future years.
Reporting Sale of the Inherited House
Obviously, when you sell an inherited house, you have to report the sale (and gains or losses) when you file your income tax return. To calculate the gain or loss, you have to subtract the basis from what you received for the sale.
To report the gain or loss, you need to use the standard document for this purpose, the IRS Schedule D. You also have to include the gain or loss on your personal Form 1040 tax return. And make sure you use the Form 1040 (and not the Form 1040A or Form 1040EZ) for the year in which you sold the inherited house.
The tax consequences when selling a house inherited in Tampa can be complex and difficult to understand at best.It’s usually a good idea to find a professional to help you navigate the tax waters.