When Selling my Inherited Property NJ, how is tax calculated?
A property that you inherit is considered an investment and will follow the laws of any investment sale. You take the difference between what is owed and the value of the property at the time of death. Any gain is taxed at a long term capital gain and any loss is long term capital loss. You can depreciation the loss forward until it is used up at $3,000 per year. This is considered the Stepped-Up Basis Rule.
How the Stepped-Up Basis Rules Affect People Who Inherit Property
“Basis” is an asset’s cost, used for tax purposes. To see if you have a loss or gain when you sell your asset you must subtract the “basis” from the selling price. A positive number will give you a gain and a negative number will give you a loss. When you buy a home regularly the “basis” is the cost of the home, (purchase price or construction cost for newly built homes) plus any improvements while you own it. See Determining Your Home’s Tax Basis for details.
However, a home’s tax basis is determined in a different way when someone inherits a home after the owner dies. When you inherit property after the owner dies you automatically receive a “stepped-up basis.” This means that the home’s cost for tax purposes is not what the now-deceased prior owner paid for it. Instead, its basis is its fair market value at the date of the prior owner’s death. This will usually be more than the prior owner’s basis.
The bottom line is that if you inherit property and later sell it, you pay capital gains tax based only on the value of the property as of the date of death.
Example: Jean inherits a house from her father George. He paid $100,000 for it over 20 years ago. George made $20,000 in improvements over the years, so his ‘s tax basis in his home just before George died was $120,000. However, when Jean inherits the home its basis is stepped-up to its fair market value on the date of George’s death. Jean has the home appraised and this value is set at $500,000. Jeans sells the house for $505,000 a few months after she inherits it. Her tax basis in the house is $500,000. She subtracts this amount from the sales price to determine her taxable gain: $505,000 sales price – $500,000 basis = $5,000 gain.
If you sell an inherited home for less than its stepped-up basis, you have a capital loss that can be deducted (assuming you don’t use the home as your personal residence). However, only $3,000 of such losses can be deducted against your ordinary income per year. Any excess must be carried over to future years to be deducted.
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