Q. We sold our parents’ home in 2014. What do we need to know for taxes this year?
A. The tax implications of a home sale can be complex, particularly when you’re selling a relative’s property rather than your primary residence. It’s always best to consult a professional tax adviser to get individualized advice, but there are some general tax tips that could apply to your situation.
Selling a home as an heir to the property
Your tax bill will vary according to how you acquired the property and when.
Recent inheritance. “If you inherited your home through a will or a trust and you sold it right away, you won’t have to pay a capital gains tax,” says Pat Simasko, owner of Simasko Law in Mount Clemens, MI.
Your residence. If you’ve lived in the property as your primary residence for at least two of the past five years, then you would be eligible for a capital gains exclusion up to $250,000 (single tax filer) or $500,000 (married couples filing jointly), says Simasko.
Investment property. On the other hand, if you’ve kept the home for a few years, you could owe taxes on your profit from the sale if you haven’t claimed it as your primary residence, Simasko says. This situation applies whether the home has been empty or you’ve used it occasionally.
Heirs who sold their parents’ home without having lived in it—but did not do so immediately after the property was inherited—will have to determine the “basis,” or value of the property, for tax purposes, says Vanessa Borges, an enrolled agent and tax preparation supervisor at Tax Defense Network in Jacksonville, FL. Next, you subtract the basis price from the sales price to determine whether you have a profit or a loss.
The good news is that beneficiaries typically have a “stepped-up” basis for a home, which is the property’s fair market value at the date of the parents’ death, says Borges. When you sell that property, you pay taxes only on gains over that basis, not the original price of the home.
For example, if your parents purchased their home for $50,000, but the property value when they passed away was $100,000, you would pay capital gains taxes only if you sold the house for more than $100,000. If you keep the house for years and then sell it for $200,000, then you would owe capital gains taxes on the $100,000 profit, says Borges.
Selling a home when your parent moves to assisted living
A similar situation applies if one of your parents has already passed away and the other recently moved into assisted living.
“If one of the parents is deceased, the surviving parent receives the ‘step up’ in basis at the time of death,” says Borges.
If you sold the home on behalf of your parent, then the parent would be responsible for paying a capital gains tax on that stepped-up basis.
Simasko says, though, that your parent may owe extra taxes depending on how long he or she has been in assisted living.
“The city or the county where the house is located can claim the house as ‘nonhomestead,’ considering the parent’s primary residence is the assisted-living facility,” says Simasko. “The taxes could be higher, because the property would be considered a second home.”
Selling a home when the property has been transferred to your name
Borges warns that there are multiple tax and financial implications for transferring property from parent to child. For example, the child might owe transfer and gift taxes when the transfer is completed. There can be an inheritance tax owed on the percentage of the property being transferred to a child or children after death, as well as capital gains tax, if the child hasn’t been living in the property for two of the past five years.
As you can see, the tax impact of selling your parents’ home can be complicated, so it’s always wise to consult a tax adviser familiar with your state laws, IRS regulations, and your finances.
If you have a need for a real estate professional, please contact me. I would also appreciate your vote of confidence by passing my name to anyone you may know who would benefit from my services.
A. The tax implications of a home sale can be complex, particularly when you’re selling a relative’s property rather than your primary residence. It’s always best to consult a professional tax adviser to get individualized advice, but there are some general tax tips that could apply to your situation.
Selling a home as an heir to the property
Your tax bill will vary according to how you acquired the property and when.
Recent inheritance. “If you inherited your home through a will or a trust and you sold it right away, you won’t have to pay a capital gains tax,” says Pat Simasko, owner of Simasko Law in Mount Clemens, MI.
Your residence. If you’ve lived in the property as your primary residence for at least two of the past five years, then you would be eligible for a capital gains exclusion up to $250,000 (single tax filer) or $500,000 (married couples filing jointly), says Simasko.
Investment property. On the other hand, if you’ve kept the home for a few years, you could owe taxes on your profit from the sale if you haven’t claimed it as your primary residence, Simasko says. This situation applies whether the home has been empty or you’ve used it occasionally.
Heirs who sold their parents’ home without having lived in it—but did not do so immediately after the property was inherited—will have to determine the “basis,” or value of the property, for tax purposes, says Vanessa Borges, an enrolled agent and tax preparation supervisor at Tax Defense Network in Jacksonville, FL. Next, you subtract the basis price from the sales price to determine whether you have a profit or a loss.
The good news is that beneficiaries typically have a “stepped-up” basis for a home, which is the property’s fair market value at the date of the parents’ death, says Borges. When you sell that property, you pay taxes only on gains over that basis, not the original price of the home.
For example, if your parents purchased their home for $50,000, but the property value when they passed away was $100,000, you would pay capital gains taxes only if you sold the house for more than $100,000. If you keep the house for years and then sell it for $200,000, then you would owe capital gains taxes on the $100,000 profit, says Borges.
Selling a home when your parent moves to assisted living
A similar situation applies if one of your parents has already passed away and the other recently moved into assisted living.
“If one of the parents is deceased, the surviving parent receives the ‘step up’ in basis at the time of death,” says Borges.
If you sold the home on behalf of your parent, then the parent would be responsible for paying a capital gains tax on that stepped-up basis.
Simasko says, though, that your parent may owe extra taxes depending on how long he or she has been in assisted living.
“The city or the county where the house is located can claim the house as ‘nonhomestead,’ considering the parent’s primary residence is the assisted-living facility,” says Simasko. “The taxes could be higher, because the property would be considered a second home.”
Selling a home when the property has been transferred to your name
Borges warns that there are multiple tax and financial implications for transferring property from parent to child. For example, the child might owe transfer and gift taxes when the transfer is completed. There can be an inheritance tax owed on the percentage of the property being transferred to a child or children after death, as well as capital gains tax, if the child hasn’t been living in the property for two of the past five years.
As you can see, the tax impact of selling your parents’ home can be complicated, so it’s always wise to consult a tax adviser familiar with your state laws, IRS regulations, and your finances.
If you have a need for a real estate professional, please contact me. I would also appreciate your vote of confidence by passing my name to anyone you may know who would benefit from my services.
408.687.2026 | Julie@JulieWyss.com | www.JulieWyss.com
