In recent weeks, I published a letter from a woman in South Carolina who had inherited a house from her mother. She asked what kind of taxes she would owe on the sale of the house.
I suggested that it depended on how long she owned the property after her mother’s death.
Well, I blew it. Several astute readers caught the error and wrote to correct it.
According to Douglas Hoover, a Worthington, Ohio-based attorney who has practiced in the areas of estate administration and income tax for the past 32 years, the holding period for inherited property is considered long-term, no matter when it is sold after death.
The good news is that the favorable long-term capital gains rate (currently capping out at 15 percent) would apply versus the ordinary income tax rates that would apply if it was treated as a short-term capital gain.
Glenn Lovell, an accountant based in Newark, Ohio, concurs. “Any property sold that was inherited automatically gets long-term capital gain treatment on the profit, if any,” he writes.
Not only that, but the sale of the inherited property can even be used to establish the fair market value on the date of the mother’s death, notes Hoover.
“Even if a property may have been appraised at $100,000 as of date of death, but was sold for $125,000 seven months later, that higher sale value can be used for capital gains basis purposes (but also estate tax purposes),” he adds.
But you can still have a situation where the inherited property sells for more but a long-term capital loss is generated. How does that work? “Throw in the expenses of sale and a long-term capital loss is generated,” Hoover writes.
The loss is created by taking the sale price of $125,000 minus the “adjusted basis” of the property, which would be $125,000 plus any expenses of sale, such as a real estate broker’s commission.
“Many baby boomers are finding themselves in the position of the mother in your article. It would be a shame for people to pay more tax than necessary due to your article,” Lovell adds.
Consider the record corrected.
Published: Nov 21, 2005
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