AM I REQUIRED TO PAY TAXES ON MY INHERITANCE?
August 6, 2013 - Posted by: admin - In category:
After the death of a loved one, there is much concern about paying taxes. One of the first questions beneficiaries ask is, “Do I have to pay taxes on my inheritance?” In most instances, the answer is no.
A beneficiary receiving inherited property, whatever the asset type, normally is not required to pay tax on said inheritance. Rather, any applicable taxes will generally be paid from the estate before assets are transferred to beneficiaries.
However, if an asset appreciates in value from the date of death of the transferor to the date such asset is later sold by the transferee, the transferee may owe capital gains taxes on the sale, depending on the transferee’s income and the then-current tax law. For example, if you inherit a parcel of real estate worth $150,000 at your parent’s date of death and you later sell the real estate and receive $160,000, you will owe capital gains on $10,000 ($160,000 – $150,000 = $10,000.) The amount of tax due will be based upon the applicable rate of capital gains tax.
A major benefit of inheriting assets is that you receive a full step-up in tax basis to the fair market value of the property at date of death of the transferring party. Consider again the example we used above:
If your parent purchased the real estate parcel for $130,000 and gave the land to you during his or her lifetime, you would receive the transferred basis of $130,000. So, when you later sold the land for $160,000, you would owe taxes on the increase in value of $30,000 ($160,000 – $130,000 = $30,000.)
In contrast, if you instead were to inherit the real estate parcel at your parent’s death, you would owe taxes only on the gain realized from the date of your parent’s death until the date you decide to sell the land. If the combined federal and state capital gains rate is 20% at the time you sell the land, inheriting the land would results in capital gains liability of $2,000—as opposed capital gains liability of $6,000 if you received the land as a gift during the life of your parent ($10,000 x 20% = $2,000 versus $30,000 x 20% = $6,000).