By Sunil Sethi, Broker, CPA (RETIRED)
One question we frequently encounter is, "What will be the gain from selling my parent’s home?" It's a valid concern, and the answer hinges on several factors, including when your parents passed away and how the real estate market has evolved since then.
In very simple terms, if the market has appreciated, you may have a gain, but if it has declined, you could face a capital loss. Let's dive into this from a real estate perspective.
In accordance with the existing tax rules, when you receive an outright inheritance, which may also include inheriting through a parent's revocable trust, the capital gains basis of the inherited property is adjusted to match its fair market value (FMV) as of your parent's date of death (DOD). This adjustment, often referred to as a "step-up in basis," aligns the property's value with the FMV at the time of your parent's passing. It's worth noting that in some instances, this adjustment can result in a "step-down in basis" if the asset's value has decreased since the initial purchase.
That basis value (adjusted for costs of sale, etc) is compared to the amount you sell the house for. If the sale amount is more than the adjusted basis value, then you may have a taxable capital gain. If it’s less, there may be a capital loss.
How is Fair Market Value Determined for Inheritance Purposes?
If you sell the house within just a few months of the parent’s passing, your sale price may be accepted as the DOD FMV. Otherwise, it is generally advisable to obtain a professional’s written opinion of the property’s fair market value as of the parent’s date of death (DOD FMV) for tax purposes. A qualified appraisal or a REALTOR Broker’s Price Opinion (BPO) is usually accepted by the IRS & FTB. The appraisal or BPO can be completed in the future when the need arises.
Example 1:
Your father passed away in June 2023, leaving the house he owned to you. The home is held in your father’s revocable trust and you are the sole beneficiary. You sell the home soon thereafter for $600,000 with sale-related costs of $50,000. What is the capital gain or loss on the sale?
Gain/(Loss) = Sales Price less Adjusted Basis of Property = (DOD FMV plus sale + selling related costs)
$600,000
- 650,000 = ($600,000 + $50,000):
---------------
- $ 50,000 Loss on Sale
Example 2:
Same as above, except your father passed away in June 2021 and you obtain a REALTOR Broker’s Price Opinion on the DOD FMV as $500,000. The house sells for $600,000 and the sale-related costs of sale are $50,000. What is the capital gain or loss on the sale?
$600,000
- 550,000 = ($500,000 + $50,000):
---------------
+ $ 50,000 Gain on Sale
These are examples of the general rules, but your actual situation could have different results depending on the history or nature of your parent(s)’ ownership or other factors.
It's essential to consult with a qualified tax professional, such as a Certified Public Accountant (CPA) or tax attorney, before making any decisions, as each situation can have its unique complexities. Having the right guidance is crucial when navigating the intricate terrain of inheriting real estate and managing tax implications.
We hope this breakdown is helpful to you in understanding how to calculate capital gains for inherited homes and when it's advisable to consider an appraisal or a BPO. We're here to help you with any real estate-related questions you may have, so feel free to reach out for more information or assistance.
Helpful Blog Post on Taxes
Installment Sale Offers Tax Advantages to Sellers
I Just Inherited My Parent's Home. How much will I pay in Taxes
Advice on How to Transfer Property to my Children
The Best Gift You Can Give is a Step-Up In Basis
Our Estate is Less than the Current Lifetime Exclusion, why file an Estate Tax Return?
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