Capital gains tax on inherited property?

Q: My husband died and I am the beneficiary of his trust, which was transferred to me. Basically everything he owned is in the trust, including our home. I transferred the title to the home into my name. I took no money out of the trust and I didn’t sell the home or any other properties held in the trust. Do I have to pay capital gains on inherited property? Thank you.

A: First, we’re so sorry for your loss. We know how difficult it can be to navigate financial issues after the loss of a loved one. The good news is that it appears that your husband had his finances under control and placed all of his assets in a living trust.

Living trusts allow for a smoother inheritance process

The purpose of a living trust is to make it easier to control your assets. Your husband’s living trust will allow you to take over the assets without having to go through probate.

Taxes are different from control. You inherited your husband’s assets at their value at the time he died. The Internal Revenue Service (IRS) loosely considers assets sold within a year of death as setting the market price for those assets. So, if you sell any of those assets within a year of your husband’s death, there would be no gain. So, no capital gains tax to pay.

Capital gains tax vs. federal estate tax

You also wouldn’t have any estate taxes to pay. Your husband is able to pass down an estate worth $12,920,000 in 2023. If your husband’s estate is worth less than that, your husband’s estate wouldn’t owe federal estate taxes either. He may have taxes to pay to the state in which you and your husband live. You can check with your State Department of Revenue for guidance.

If you decide to sell the home you’ve inherited, you would get another tax break. You can keep up to $250,000 in profits tax free on the sale of your primary residence, as long as you’ve lived there for two of the past five years.

How to Avoid Paying Capital Gains Tax on Inherited Property

If you lived there with your husband before his death, and decide to sell now, you may be able to take up to $500,000 in profits tax-free, if you sell within two years of your husband’s death. According to Publication 523: Selling Your Home, you must meet the following conditions to qualify for the $500,000 tax exclusion: “You sell your home within 2 years of the death of your spouse; you haven’t remarried at the time of the sale; neither you nor your late spouse took the exclusion on another home sold less than 2 years before the date of the current home sale; and, you meet the 2-year ownership and residence requirements (including your late spouse’s times of ownership and residence, if applicable).”

Let’s assume, your home was owned solely by your husband in his trust. With his death, you became the owner.

If your husband’s estate has no federal estate taxes to pay, he gets to pass the home to you and you can then sell it down the line. You inherited the home at its value at the time he died. So if you sell it in five years and realize a profit of $250,000, there would be no capital gains tax due at the time of sale, provided tax laws stay as they are.

Most people in your situation won’t face capital gains or estate tax issues. If your husband’s trust has assets (including stocks, bonds, or other real estate property) that exceed $12,900,000 (in 2023), then you may owe some tax. An accountant, enrolled agent or local estate attorney can provide more specific information on how taxes would be levied on each of these other asset classes.