Sold inherited property and tax liability

Losing a loved one in Michigan is difficult, and figuring out what to do with inherited property can add to stress levels. If the inheritance included a house or other physical property, the beneficiary may choose to sell it. While there should not be an inheritance tax associated with inheriting the house, there are tax liabilities if the sale resulted in a profit for the seller.

Before establishing if it is taxable, the IRS reports the first thing to determine is the basis of the property. This basis is either the fair market value of the property on the date of the descendant’s passing or the FMV on the alternate valuation date. This differs from a non-inherited property’s basis, which is typically the seller’s cost. If the sale price of the inherited house is more than the basis value, the difference is taxable. Sellers may face an accuracy-related penalty if they use a basis that is higher than the actual final valuation.

According to the Small Business Chronicle, there are a number of things the seller should have in order to determine the tax amount. These include:

  • Date of the descendant’s passing
  • Detailed portrayal of the inherited home or land
  • Value of the property on the death date, typically provided by the administrator or executor of the estate
  • Date of the sale of the property
  • Net earnings from the property sale
  • IRS Schedule D (Form 1040)

The tax rate of the property sale earnings falls under the long-term capital gain rate, even if it was only in the seller’s possession for a short amount of time.