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, you don’t have to pay taxes on what you inherit unless you live in a state with an inheritance tax (Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania). There are tax forms that may need 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 the executor sells the real estate. The estate will have either capital gains or capital losses based on the difference between the decedent’s purchase price and the selling price.
What if Mom gifts the house to her children before she dies? If she bought the house for $100,000, gives it to her children, and then they sell it for $120,000, they’d have to pay capital gains taxes on the $20,000. But if they receive the real estate after Mom dies, they’ll get a step-up in basis – they inherit the property valued as of the date of Mom’s death. So, if Mom bought the house for $100,000 and its fair market value at her death was $220,000, and the children then 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. It would be far better for the family to talk about the property before the parents die and work out a plan.
The problem often centers on a summer home that’s being passed down to multiple children. One child 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 while they’re still alive, the real estate is less likely to become a divisive issue when the parents die and emotions are running high. This also gives the parents a chance to talk about what they want to happen after they die, 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 a family’s memories or history.
The best thing for families that desire to pass a house down to the next generation is to start the discussion early and to 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 ugly surprises.
Reference: Petoskey News-Review (June 25, 2019) “The pros and cons of inheriting real estate”
