If you recently inherited a home, you might be wondering about the various tax repercussions of owning, keeping, or selling that property. As you might expect, inherited property taxes work a little differently from those on your primary residence, and even those on a second home. These taxes might seem confusing when you’re first starting out, but the basics are pretty straightforward.
How Do Inherited Property Taxes Work?
The goods news is that there is no federal inheritance tax, which means you won’t have to pay taxes on a property simply for inheriting it. Some states have a state inheritance tax, but luckily, North Carolina is not one of these states. Mostly, inherited property taxes come from the sale of the property. Here are some taxes you need to know about.
Capital gains tax
Usually, when you sell your home, you pay a capital gains tax on the increase in value from your initial purchase price to your final sale price. On a residence you’ve lived in for two of the last five years, you’ll be able to exclude a portion of your profit ($250,000 if you’re single, $500,000 if you’re married) from this tax. However, if you have not lived in the home, as is often the case with an inherited property, you won’t qualify for this exclusion.
Before you start panicking about having to pay an enormous capital gains tax, understand that capital gains on an inherited property work a little bit differently from those on your primary residence. If you inherited the property from someone who lived in the home for a long time, there probably is a sizeable increase in the value of the home. Fortunately, you won’t pay taxes on the gain in value from the time of that person’s ownership to the time when you sell it.
Instead, the property is assigned a Fair Market Value at the time of inheritance. You’ll only pay a capital gains tax on the difference between that value and the price you eventually sell for—which typically ends up being considerably less than from the beginning of the previous owner’s ownership!
Other Financial Considerations of Inherited Properties
Inheriting a property comes with a lot of financial facets besides taxes. Before you decide to sell, rent, or keep the home, you might want to put some thought into these questions.
Is there a current mortgage?
If there is currently a mortgage on the home, you’ll want to find out whether you can simply assume that mortgage, or whether you’ll have to pay it off upon inheritance. This may be the case with an unconventional mortgage like a reverse mortgage.
Is the property in good condition?
If the home’s previous resident was elderly or unable to regularly maintain it, the home might be in need of a few repairs and updates before it can be transferred to another owner or tenant. Depending on the state of the home and the size of the repairs needed, it might simply be best to sell as-is.
Are there other heirs?
It’s common for siblings to inherit a home together. This can present a challenge, particularly in cases where siblings have varied ideas about what should be done with the property. Some may want to keep or move into the home, while others would prefer to sell the property as quickly as possible. It may also be difficult to determine what should be done with belongings in the home, as well as whether repairs should be made and who will pay for the repairs.
You Need an Agent Who Knows Estate Sales
If you decide to sell your inherited property, one thing’s for sure: you need a local agent who understands the intricacies of estate sales. Looking for such an agent? Contact Ann Milton Realty today to learn more about our experience and how we can help you price your home, get it market ready, and list it for top dollar.