Tax Consequences of Inheriting a House From a Deceased Parent
If you are like the vast majority of folks inheriting a house from your parents, there will be no tax consequences arising from your inheritance. This is because a sizable stake of inherited wealth is exempt from taxes. In the rare cases in which estates are so large they trigger an estate tax, often the deceased has provided for the tax payments in his will or trust.
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History
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Inheritance taxes, also called estate taxes, or “the death tax,” date back to 1916 in the Internal Revenue Code. In the early years, the tax rate topped out at 10 percent for estates in the $5 million range and above. By the mid-1930’s, it had reached 70 percent for estates at $50 million and above. An estate under $40,000 was exempt from the death tax at that time. The exemption steadily grew to $175,000 by the early 80’s. At that time, the initial tax rate was 18 percent, climbing to 70 percent by $5 million.
Current Rules
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A trend toward lower taxes began in the 1980s bottomed out in 2010, in which there was no estate tax at all. This was a one-time event included in what has become known as the “Bush tax cuts.” As of 2011, the exemption was $ 5 million and the top tax rate is 35 percent. In 2013, unless other legislation is passed, the estate tax will revert to a $1 million exemption with a tax rate of 55 percent.
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Taxing the Estate
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The IRS looks at the deceased entire estate to determine whether it is exempt from taxes. It looks, then, not just at the house you might be inheriting but at everything in the estate. If the estate value is equal to or less than the tax exemption in effect at the time of death, the house you inherit will be exempt from taxes. If the estate is not exempt, then the tax will be figured based on the estate value and the tax rate in effect at the time.
How Tax is Paid
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Some wills and trusts specify how estate taxes are to be paid – for instance, from a specific source of funds not designated for an heir. If no designation is included in these documents, the trustee or other party charged with settling the estate by the deceased or a court, in the case of a probated estate, will arrange for payment of taxes before distributing the estate. In some cases, real estate must be sold to pay the tax and the balance left is distributed to heirs.
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References
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