You just inherited a house, and you’re deciding to either sell the house or move into the place. Well, before you decide anything, you should hear about all the taxes that you might have to pay. Depending on your state, this could mean inheritance tax, and possibly capital gains tax. But don’t worry, knowing what to expect is half the battle. To find out which of these taxes apply to you, keep reading!
Inheritance Tax
The first thing you need to know about inheritance tax, it’s completely different from anestate tax. It’s extremely important to know the difference because the two terms are often used interchangeably. But don’t be fooled! These taxes are NOT the same thing. Inheritance tax is a tax that a person pays when they receive an inheritance. An estate tax is a tax that is paid with funds found within an estate. Many people get these two confused is that they consider a house to be an estate. When in reality, a house is only part of an estate. An estate is everything a person solely owned before passing away. This can include cars, money, antiques, life insurance and more.
Now that you know the difference between inheritance tax and estate tax, it’s important to know when inheritance tax applies to you. If you’re inheriting a house from a deceased person, you have to check if your particular state has an inheritance tax.
For example, states like Washington D.C. and Virginia don’t have an inheritance tax, but Maryland has a 10% tax on inheritance. If you live in a state with inheritance tax, don’t worry just yet. You could be exempt from paying inheritance tax. In Maryland, for example, immediate family members of the deceased person and certain non-profits are exempt from inheritance tax. So make sure to check your specific state laws and check to see if your state has any exemptions.
Capital Gains Tax
If you just inherited a house and want to sell it, you may have to worry about capital gains tax. This is a tax that occurs if you sell an inherited property, without living in it for at least 2 of the last 5 years. If you have lived in the property for more than two years in the past 5 years, you can be exempt from capital gains tax up to a certain amount. If you are single, the amount is $250,000. If you are married, the amount is $500,000.
But how do you know how much tax you pay? Well, there’s a formula.
(Sale Price) – (Fair Market Value of the House at the Date of the Owners Death)
If the number is positive, then you pay capital gains tax on that amount.
If the number is negative, then a capital loss can be claimed on your taxes and $1.5 thousand of that can be deducted from your income taxes ($3 thousand if filing with a spouse).
Here are two examples:
Sarah inherits Brad’s house. She has the home appraised, and it’s found to be worth $600 thousand. Sarah then sells the house 2 months later for $605 thousand. Sarah then pays capital gains tax on the $5 thousand ($605 thousand-$600 thousand).
OR
Sarah inherits Brad’s house. She has the home appraised, and it’s found to be worth $600 thousand. Sarah then sells the house 2 months later for $550 thousand. Sarah then claims a capital loss of $50 thousand ($550 thousand- $600 thousand). Sarah is not married and therefore deducts $1.5 thousand from her income taxes.
Here’s a Capital Gains Calculator to make things a little easier for you.
Selling Your House
If you’re thinking of selling your inherited house, call Easy Outs Homes to receive a fair cash offer in minutes! And once we make a deal, we’ll also provide you with a free probate attorney to help you through the entire probate process. Call us today to find out more information!
The inheritance tax is imposed on the clear value of property that passes from a decedent to some beneficiaries. The tax is levied on property that passes under a will, the intestate laws of succession, and property that passes under a trust, deed, joint ownership, or otherwise. The tax is collected by the Register of Wills located in the county where the decedent either lived or owned property.
The Maryland estate tax is a state tax imposed on the transfer of property in a decedent's estate. Payment of the Maryland estate tax is due nine (9) months after the decedent's date of death.
A Maryland estate tax return is required for every estate whose federal gross estate, plus adjusted taxable gifts, plus property for which a Maryland Qualified Terminal Interest Property (QTIP) election was previously made on a Maryland estate tax return filed for the estate of the decedent's predeceased spouse, equals or exceeds the Maryland estate tax exemption amount for the year of the decedent's death, and the decedent at the date of death was a Maryland resident or a nonresident but owned real or tangible personal property having a taxable situs in Maryland.
The gross estate includes all property, real or personal, tangible or intangible, wherever situated, in which the decedent had an interest. It includes such items as annuities, joint assets with right of survivorship, transfers made without adequate consideration, the includible portion of tenancies by the entirety, certain life insurance proceeds, and general power of appointment property, to name a few. The value of the property must be based upon an appraisal from a Certified Appraiser. For more information on the gross estate, visit the IRS website regarding the Federal Estate Tax and review 2031 of the Internal Revenue Code.
The probate estate is property of the decedent owned individually or as tenants in common. Non-probate property is property that passes by the terms of the instrument under which it is held or by operation of law. The total gross estate for estate tax purposes includes probate and non-probate property.
Tax rates for decedents who died before July 1, 1999:
1% tax on the clear value of property passing to a child or other lineal descendant, spouse, parent or grandparent.
10% on property passing to siblings or other individuals.
Tax rates for decedents who died on or after July 1, 1999:
0.9% tax on the clear value of property passing to a child or other lineal descendant, spouse, parent or grandparent.
8% on property passing to siblings.
10% on property passing to other individuals.
Tax rates for decedents who died on or after July 1, 2000:
Property passing to a child or other lineal descendant, spouse of a child or other lineal descendant, spouse, parent, grandparent, stepchild or stepparent, siblings or a corporation having only certain of these persons as stockholders is exempt from taxation.
10% on property passing to other individuals.
Effective for decedents who die on or after July 1, 2009, a primary residence that is owned by domestic partners held in joint tenancy at the time of one partner's death is exempt from the Maryland inheritance tax.
During the 2012 Legislative Session the Maryland General Assembly enacted the Family Farm Preservation Act of 2012, which adds a new subsection to Title 7 of the Tax-General Article allowing for the exclusion of up to $5,000,000 of the value of qualified agricultural property from the value of the gross estate for decedents dying after December 31, 2011. The new provision also provides that the Maryland estate tax may not exceed 5% of the value of specified agricultural property exceeding $5,000,000. Maryland qualified agricultural exclusion forms may be obtained by calling the Estate Tax Unit at (410) 260-7850.
Legislation enacted during the 2014 legislative session gradually conforms the Maryland estate tax exemption amount to the value of the unified credit under the federal estate tax, thereby increasing the amount that can be excluded for Maryland estate tax purposes. The increase in the amount that can be excluded for Maryland estate tax purposes is phased over five years and is equal to (1) $1.5 million for a decedent dying in calendar year 2015; (2) $2.0 million for a decedent dying in calendar year 2016; (3) $3.0 million for a decedent dying in calendar year 2017; (4) $4.0 million for a decedent dying in calendar year 2018; and (5) $5.0 million for a decedent dying on or after January 1, 2019. Check the Internal Revenue Service website for information on the federal estate tax exemption.
Most recently, the Maryland General Assembly enacted legislation during the 2015 legislative session that changed the option allowing Maryland estate tax returns to be filed with the Register of Wills or with the Comptroller. Beginning July 1, 2015, all Maryland estate tax returns must be filed directly with the Comptroller. Requests for certification of the amount of inheritance paid on behalf of a decedent will be made by the Comptroller only; such certification requests should no longer be made by the personal representative of the decedent's estate or any other person required to file a Maryland estate tax return with regard to property passing from the decedent.
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