“There are many types of taxes to consider in connection with an estate: estate tax, inheritance tax and income tax.”
After the last surviving parent passes away, the estate may sell the family home. The proceeds are then divided up, pursuant to the directions set out in the will or trust. If children are the heirs, they may split the funds among themselves. However, what are the tax consequences?
nj.com’s recent article asks: “I inherited my father’s home. Do I owe any kind of taxes?”
The article explains that the federal estate and gift tax exemption amount is now $11.4 million. In New Jersey, residents who die on or after January 1, 2018 are no longer subject to a New Jersey estate tax and children are exempt from the inheritance tax. There is also, however, the question of income taxation.
The proceeds from the sale of the house will be subject to income tax. However, it’s unlikely that a person would incur the tax, because income tax is paid on the difference between the sales price and the basis of the asset, minus costs of the sale.
“Basis” is generally defined as the purchase price, plus the cost of improvements.
Assets owned by a decedent receive a “step-up” or a “step-down” in basis to the value, as of the date of death.
This means that a sibling inheriting a parent’s home and then selling it, would only be taxed on the difference between the sales price and the value at the date of death, less selling costs, assuming the parent owned 100% of the home at the time of his death.
If this difference between date of death and sale values is substantial, the adult child would incur a tax, typically at capital gains rates. However, as a general rule, there’s little or no gain to tax.
Be sure to keep evidence of the date of death value of the parent’s home, in case there’s an income tax audit down the road.
Reference: nj.com (March 11, 2019) “I inherited my father’s home. Do I owe any kind of taxes?”