Inherited a house? Congratulations, it’s definitely a nice financial bonus that comes with a few advantages. What you need to do next requires good planning though. For a lot of people, inheriting a property is definitely a good thing. It can make money if you rent it out or sell it.
No matter what you choose to do, you have to think about the drawbacks too. And that’s when taxes kick in, you just can’t avoid them. Here are the three most important taxes that may affect your inherited house.
Understanding the Local Property Tax
This tax is set by the city or town. It’s basically a municipality tax, and it’s determined by the location. If you’re in a fancy neighborhood, you’ll obviously pay more. If you’re in an area with a high crime rate and less development, the tax will be quite low.
You won’t know this tax unless you ask. Only then you can determine whether you should sell the house or keep it. If you’re not desperate to sell, holding onto it for a long period of time could be a better idea. Anyway, if the deceased person still had a mortgage, the tax would probably have been paid.
If the mortgage has been cleared, ask the tax office.
Checking the Federal Estate Tax
The federal estate tax doesn’t make much sense because it depends on the estate. It’s set by the IRS, of course and it comes with a limit. The value of the estate determines the tax. If the estate is over that limit, you have to pay the tax.
The IRS won’t bother about the value of the house. If you inherit a ruin on a nice estate, you’ll have to pay this tax. It sounds crazy, but that’s the law.
Anyway, you need to get in touch with the tax office within nine months after you inherit the house. Do it as quickly as possible.
How About the Capital Gains Tax?
If you’re currently thinking about how I can sell my house fast consider that while getting rid of the property will save you some money on the abovementioned taxes, but you’re making a profit, and it has to be taxed.
This tax is all about appreciation. If there’s no appreciation until you sell the house, you won’t have to bother about the tax. It only applies to the profit you make. The same goes if you sell it for less money.
Obviously, the IRS will determine the price when you inherit it. Otherwise, you could just estimate a house at $1M and sell it for a more realistic price, just to dodge the tax.
The tax is paid on the actual profit only, not the whole house price.
Bottom line, while a house coming to your ownership can feel like an amazing financial benefit, it does have its drawbacks in forms of taxes. Furthermore, if there are more people inheriting the property, these taxes will be split equally.
