How to Report the Sale of an Inherited House on Taxes
The Internal Revenue Service (IRS) does not require a decedent's beneficiaries to pay income taxes on their real property inheritances. However, a few states impose inheritance taxes on beneficiaries who inherit both personal and real property. In these jurisdictions, beneficiaries may pay taxes on the entire value of their inherited property at the time the property was initially transferred. Although the IRS does not impose taxes on beneficiaries' inherited homes at the time of transfer, it requires them to pay federal income taxes if they subsequently transfer the property through sale or gift. As such, an original beneficiary will pay income taxes once he sells his home or transfers his home as a gift. In other words, the donee, or taxpayer receiving the gift, is not responsible for paying gift taxes. Instead, the IRS taxes the donor, or the taxpayer giving the gift, and in this case, the donor is the original beneficiary of the inherited property.
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Things You'll Need
- IRS forms
- Real estate appraisal
- Filing fees for Form 4506, if necessary.
Instructions
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Determine the basis of your house or the value of it when you sell it. According to the IRS, taxpayers must pay taxes on the difference between the value at the time of sale and at the time they inherit it. Thus, the taxpayer's original basis is the value of his property at the time of the decedent's death.
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Complete IRS Form 4506, "Request for Copy of Tax Return." You can visit the IRS website and obtain a free electronic copy or request a free hard copy by calling their toll-free number. If you do not have an affidavit that should have been given to you as the property value statement, you will need to contact the IRS. You can send a written request to the IRS for the estate's tax return under the Freedom of Information Act by sending a check for $57 and completing Form 4506.
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Obtain and complete IRS Form 709, "United States Gift (and Generation-Skipping Transfer) Tax Return." At the time of publication, if the value of your property is more than $13,000, you will pay gift taxes on it for the appraised value of your home minus the value of your home on the date the decedent died. However, under the federal gift "splitting" rules, if you are married and file your taxes jointly, you and your spouse can make a joint gift of $26,000 annually without paying federal income taxes. The difference is your total taxable income, and you must report it on lines 1 through 4.
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File IRS Form 709 after January 1, but by April 15 of the tax year after you gave your gift.
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Tips & Warnings
You may be able to claim a capital loss on your gift in limited circumstances. Furthermore, you may be able to claim a charitable deduction in limited circumstances.
The information in this article should be used for general guidance. Seek the advice of a licensed attorney or certified public accountant in your state.
