Beginner’s Guide to Home Inheritance Tax

There are several important points to consider when inheriting a property, and home inheritance tax is one of them. Find out what tax liabilities may apply.

Americans inherited about $427 billion in 2016, and this number is expected to rise annually in the coming years. For many, the estate they inherit will include a home. This will lead to many people facing a new financial and legal liability that they are unprepared for. 

The home inheritance tax is a financial liability that you don’t worry about until you inherit a home. This guide will give you all of the home inheritance tax information you need to make smart money decisions. 

What Happens When You Inherit a Home? 

There are three things you need to think about when you inherit a home. The first is to consider the financial and legal responsibilities of your new asset. The second is to find out what your tax liabilities are for the property. 

The third consideration is what you will do with the home. You could sell it, rent it out, or move into it. What you decide to do will depend on your current living and financial situation. 

Do I Pay Taxes on Inherited Home Sale?

You won’t have to worry about paying a federal inheritance tax. You will have to check if your state has an inheritance tax. Although, inheriting property doesn’t immediately trigger a tax liability for you. 

What does happen is a step-up basis aplication for the value of the property. The IRS establishes a new fair market value for the inherited property. This new value is what future capital gains taxes are based on when you sell the property. 

Can I Avoid Estate Taxes on Inherited Home?

There is a way to avoid capital gains taxes. If you decide to keep the home, you could qualify for specific exclusions. You’ll need to use the home as your primary residence for at least two out of a five-year period, and not use the capital gains exclusion on another property in the two years prior to the sale. 

Disclaiming an Inheritance 

If you don’t want to worry about taxes at all, you can avoid the inheritance completely. Disclaiming an inheritance means you don’t inherit the house. The catch to this approach is that you can’t go back on the decision once you do it. 

What if You Sell the Home? 

Sometimes, the best option is to sell the home. This is often the case when more than one person inherits the home. Selling the property removes the legal and financial responsibilities that come with the property. 

It’s also easier to divide the proceeds from the sale among several people. One option is to sell your house fast to a cash buyer. This makes the process quick and simple. You won’t have to go through the listing, showing, and negotiating process. 

Know Your Home Inheritance Tax Liabilities 

If you find yourself inheriting a home, then you need to know what your liabilities are. One of the biggest ones is the home inheritance tax. The good news is that you can avoid a large amount of your tax liability by fulfilling certain requirements. 

Browse our other finance articles for more helpful money advice. 

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