There’s a lot of decisions to make when you inherit a home. It’s often times a great, but unexpected asset. An asset that can have life-changing consequences. It’s great to get to know all the ins and outs of what exactly that means. For example, you may be asking, “what are the tax consequences when selling a house I inherited in Shreveport LA?”
Tax Consequences when selling a house I inherited in Shreveport, LA
Step-up of basis
The “basis” of a property is essentially its original cost, including any improvements made over time. When someone buys a house, their basis is typically what they paid for it.
When you inherit a property, the tax law allows for a “step-up” in the property’s basis. This means that instead of using the original cost (or the cost when the original owner bought it) as the basis, the basis is adjusted to the property’s fair market value at the time of the original owner’s death.
The positive tax consequences when selling a house you inherit is the reduced potential for capital gains tax when you decide to sell. Capital gains tax is calculated based on the difference between the sale price and the property’s basis. With the step-up in basis, the basis is adjusted to the property’s current market value, minimizing the taxable gain.
Let’s say your parent bought a house for $150,000 many years ago. When they passed away, the house’s value had appreciated to $300,000. If you inherit the house and later sell it for $320,000, your taxable gain is calculated based on the difference between the sale price and the stepped-up basis (fair market value at the time of death), not the original purchase price. This adjustment can significantly reduce the taxable gain and, consequently, the potential tax consequences of selling the house you inherited.
By stepping up the basis to the property’s current value, the tax code recognizes that you, as the inheritor, didn’t personally benefit from the property’s appreciation during the original owner’s lifetime. This recognition helps minimize the capital gains tax burden when you sell the property.
The step-up in basis encourages individuals to hold onto their assets and pass them on to heirs without incurring significant tax consequences. It recognizes that the appreciation in value during one’s lifetime shouldn’t create a heavy tax burden for the heirs.
Capital gains tax
Capital gains can be another unexpected tax consequence when selling a house you inherit. They are profits earned from the sale of an asset, such as real estate, stocks, or other investments. When you sell an asset for more than you paid for it, the difference between the sale price and the original purchase price is considered a capital gain.
Capital gains can be categorized into two types: short-term and long-term. The classification depends on how long you held the asset before selling it. If you held the asset for one year or less, it’s a short-term capital gain. If you held it for more than one year, it’s a long-term capital gain.
Short-term capital gains are usually taxed at the individual’s ordinary income tax rates, which can be higher than the rates for long-term gains. Long-term capital gains generally enjoy lower tax rates, encouraging long-term investment.
The step-up in basis, especially in the context of inherited property, plays a crucial role in determining the taxable gain when the property is sold. As discussed earlier, the stepped-up basis is the fair market value of the property at the time of the original owner’s death.When you sell an inherited property, the capital gains tax is calculated based on the difference between the sale price and the stepped-up basis. This adjustment helps minimize the taxable gain and, subsequently, the capital gains tax liability. This helps make the tax consequences when selling a house you inherit work for you, instead of against you.
There are potential exclusions and deductions that can further reduce the impact of capital gains tax. For instance, if you sell your primary residence, there’s a potential exclusion of up to $250,000 ($500,000 for married couples filing jointly) if certain criteria are met.Capital gains are reported on your income tax return. You typically use Schedule D (Capital Gains and Losses) along with Form 1040. Reporting requirements may vary based on the type and amount of capital gains.
Possible inheritance taxes
An inheritance tax is a tax levied on the value of assets inherited by individuals. Louisiana does not have an inheritance tax. Therefore, if you inherit property in Louisiana, you generally won’t owe state inheritance tax on the value of the inherited property. So, no negative tax consequences to worry about there.
While Louisiana does not have its own estate tax, the federal government imposes estate tax on very large estates. The federal estate tax applies to the overall value of an estate and is paid by the estate before distributions to heirs. However, the federal estate tax typically applies only to estates with a value well above the exemption threshold.
Deductions to help lower tax liability
When selling an inherited property, certain expenses incurred during the sale process may be deductible. These expenses can include real estate agent fees, legal fees, and closing costs. Deducting eligible selling expenses can help reduce the taxable gain from the sale.
Costs associated with necessary home improvements or repairs made to the inherited property may be considered as part of the property’s basis. While these costs may not provide an immediate deduction, they can impact the property’s value and, consequently, the potential capital gains tax when the property is eventually sold.
If you continue to own and maintain the inherited property, property taxes paid on the property may be deductible. Property tax deductions can help lower the overall tax liability associated with property ownership.
If you inherit a property with an outstanding mortgage and you continue to pay the mortgage interest, the interest paid may be deductible on your income tax return. This deduction can be applicable if you live in the inherited property or use it as a second home.
Expenses related to the administration of the estate, such as legal fees and accounting fees, may be deductible. These expenses are typically incurred by the estate before assets, including the inherited property, are distributed to heirs.
Remember that tax laws can change, and it’s essential to consult with a tax professional or accountant for the most up-to-date and accurate information regarding capital gains tax and any potential tax benefits related to inherited property. Given the complexity of tax laws and the potential for changes, it’s crucial to consult with tax professionals, such as accountants or tax attorneys, for personalized advice. Tax professionals can help identify specific deductions applicable to your situation, guide you on proper record-keeping, and ensure compliance with current tax laws.
Going through the succession process
Having an inherited home can be stressing given the fact that you have new property to take care of and pay taxes for it at the same time… You should go through the succession process in Shreveport as the first step to selling your home. The court will then authorize you to proceed as you wish. If there are any other individuals involved in the inheritance, you should first agree with each other on that decision. You can then file a petition requesting the court to allow you to sell the property.
Selling an inherited house
Often times inherited houses, while a great asset, can turn into a liability quickly. If the house comes with a mortgage, you’ll be responsible for keeping that up, as well as having insurance on it, and paying state and federal taxes yearly. Upkeep can get pricey, too. Yard upkeep, major and minor fixes, and unexpected repairs always happen on houses. Usually homeowners should plan on paying 3-5% of their home’s value in upkeep and repairs yearly, especially on older houses.
If you want to turn your asset into cash so you don’t have to worry about maintenance, repairs, and mortgages, selling quickly is a great option. Of course all cash offers from us are no-obligation, and can help you get a feel for all your options so you can make an educated decision. You can call Right Time Home Offers now at (318)217-2167 to undertake a smooth and legitimate sale of your home. We are local here in Shreveport LA and we know the market here better than anyone else. If you are still asking yourself what are the tax consequences when selling a house I inherited in Shreveport, then we would be happy to discuss it with you in more detail.
Selling an inherited house can be life-changing. In addition to that, selling the property to an investor is a basic simple and fast process. Contact us for inquiries on how to go about things when selling your home in Shreveport and we will be glad to help you.