The number one question on most people’s minds when they inherit real estate is whether they have to pay taxes on it.
For the most part, people don’t have to pay taxes on what they inherit, unless they live in a state with an inheritance tax. There are tax forms to be filed, says the Petoskey News-Review in the article “The pros and cons of inheriting real estate,” but not every estate has to pay taxes.
The estate has to pay taxes on any gains or losses after the death of the decedent, if and when they sell the property. The seller will have either capital gains or capital losses, depending upon what the house was purchased for and what it sold for.
Let’s say that Mom purchased the house for $100,000, gave it to her children and then they sold it for $120,000. They have to pay capital gains on the $20,000. When someone dies, heirs get the step-up in basis, so they get the value of the property at the date of the decedent’s death. If mom bought the house for $100,000 and when she died it had jumped in value to $220,000 the children sold it for $220,000, there would be no capital gain.
People who inherit property should have it appraised by an experienced real estate appraiser to determine the actual value at the date of death. An estate planning attorney will be able to recommend an appraiser.
One of the biggest disagreements that families face after the death of a loved one centers on selling real estate property. Some families actually break up over it, which is a shame. It would be far better for the family to talk about the property before the parents die and work out a plan.
The sticking point often centers on a summer home being passed down to multiple heirs. One wants to sell it, another wants to rent it out for summers and use it during winters and the third wants to move in. If they can resolve these issues with their parents, it’s less likely to come up as a divisive factor when the parents die and emotions are running high. This gives the parents or grandparents a chance to talk about what they want after they have passed and why.
Conflicts can also arise when it’s time to clean up the house after someone inherits the property. Mom’s old lemon juicer or Dad’s favorite barbecue fork seem like small items until they become part of family history.
The best thing for families that are able to pass a house down to the next generation is to start the discussion early and make a plan.
An estate planning attorney can help the family work through the issues, including creating a plan for how the real estate property should be handled. The attorney will also be able to help the family plan for any taxes that might be due, so there are no big surprises.
Reference: Petoskey News-Review (June 25, 2019) “The pros and cons of inheriting real estate”