What is ‘Inherited’?
Taxes on Inherited Property can be very confusing. I had one of several siblings come to me with a tax problem with their jointly owned inherited property. When I asked a few questions about how their dad acquired it, she said, “I don’t know. I’ll ask him,” and she proceeded to call him…on the phone. They didn’t hold a séance or use a Ouija board. Dad was very much alive. Girl, you didn’t inherit anything. That was a gift.
When you inherit something, the person you get it from has to be dead. I know that sounds insensitive, but I have to be completely clear. You cannot inherit anything from someone who is alive.
If someone gives you something when they are alive, whether it is a 40-acre farm, their car, or $20, it is a gift. Gifts are NOT inheritance and the taxes are very different.
But Diane, you said in that other blog that Gift Tax and Estate Tax are the same thing. I did, but that is for the Giver. The rules are far different for the Receiver, and the tax consequences are far different.
Who is Selling the Property?
People often come to me with questions pre-maturely, terrified of owing the government, and trying to solve problems that do not exist. First, be certain if you are inheriting the property, then selling it, or if your loved one’s estate is liquidating property to pay the bills for the deceased person. There is a big difference. If you are selling off someone’s property to cover their remaining bills after they passed, then you didn’t inherit anything. You are settling their estate as executor. It isn’t yours yet.
NOTE: If you are settling someone’s estate on your own, you need more than a blog, you need an attorney to help you through probate court. Please find an attorney that specializes in probate court in your county. You would not go to a dentist or a foot doctor for heart surgery, so don’t go to your friend’s divorce attorney for probate. Get an expert that knows the clerk, judges, and everyone else that will be involved in your case. Probate is technical, you need an expert.
If I Sell Inherited Property, How is it Taxed?
Let’s review capital gains tax: If you buy something (stock, bitcoin, land, houses, collectors’ items, antiques, abandoned storage units, etc.) and then you sell it later for a profit, that is capital gains. If you buy for $100 and sell for $120, you pay taxes on the $20 you profited. Capital gains (buy and sell amounts) are reported on Form 8949 on your taxes.
If you inherit a piece of land or a car or jewelry or anything that isn’t cash, and you turn around and sell it immediately, chances are that your taxes are zero. Here’s why: when you inherit something, your basis (your ‘buy’ price) is the Fair Market Value (FMV) of the property on the day your loved one died. If you sell off the property shortly after you inherit it, it is likely you sold it at FMV. Your buy is $300, your sell is $300, your profit is zero. You still need to report it on your taxes, but the taxable amount is zero. That is the beauty of stepped-up basis. You inherit things at Fair Market Value.
What About a Gift? How is that Taxed?
Let’s go back to the lady who called her dad about the property she ‘inherited’ (which was actually a gift). He just gave his property to his kids, filed the deeds himself, didn’t consult an attorney or tax professional, and DIY’d the whole thing. Who needs an Attorney? Right?
Wrong. Always get advice from someone who knows all the details. Sure, Estate Tax and Gift Tax are the same thing for the Giver, but for the Receiver, it is a completely different world.
You do NOT get the stepped-up basis when you receive a gift. Your basis (your buy price) is the same as the Giver’s was. You need to find out what they paid for it and when and you need to be able to document that. Really nice, huh? Thanks for the diamond ring, Grandma, but what did Grandpa pay for it in 1951? Do you still have the receipt? If you have no proof and no testimony, guess what your basis (buy price) is? Zero. So, if you sell it, all the money is taxable.
This is easier to calculate with land because the courthouse documents everything. In the case of the siblings above, Dad bought the land in 1973. So rather than the siblings inheriting it with a stepped-up basis of about two million when their dad passes away and selling inherited property with zero tax due on the two million, Dad gifted it to them. Now their basis is the $20,000 he paid in 1973, and they owe taxes on $1,980,000.
BIG difference if you are the Receiver if you sell a gift rather than sell inherited property. It is not the same.
Always consult a professional if you are considering giving away your property OR if a relative is trying to give you something valuable now rather than put you in their will.
Please get the advice of a tax professional before accepting a large gift that you plan to sell.