When you inherit a house after your loved one has died, you might wonder whether you are able to take the home sale exclusion when you sell it. You are not able to take the exclusion, but you might benefit from the rules for a stepped-up basis for inherited homes. The professionals at Elder Care Direction can offer some guidance to you about how the inherited property might be treated, and we can refer you to our trusted partner attorneys if you require more help.
Understanding the home sale exclusion
Homeowners are given a tax exclusion when they sell their homes of up to $250,000 for any gains that they receive. A single homeowner is able to enjoy these gains tax-free. Married homeowners who file jointly are able to exclude up to $500,000 from their income. To qualify for the home sale exclusion, the homeowners must have lived in the home for a minimum of two years out of the five years that precede the sale.
To qualify for the home sale exclusion for an inherited home, you must first move into it and live there for a minimum of two years. Because of the stepped-up basis rules, you might not need the exclusion, however.
Stepped-up basis rules for inherited property
An asset’s basis for tax purposes refers to its cost. To figure out whether you have a profit or a loss when an asset is sold, you take away the basis from the sales price.
To figure out the basis of a home that you build or buy, you would add the cost along with the improvements that you have made to it.
When a home is inherited, however, the basis is figured out differently. When your loved one dies and leaves you a home, you receive what is called a stepped-up basis. This means that the home’s basis will not be what your deceased loved one paid for it. Instead, the basis will be its fair market value on the day that your loved one died.
If you decide to sell the home in the future, you will be responsible for capital gains taxes on the value of the home on the date that your loved one died.
If you sell a home that you inherit for less than the stepped-up basis, you will have a loss that you can deduct. however, you can only deduct $3,000 of capital losses each year. If you have an excess, you will need to carry it over to future years in order to deduct it.
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