A death in the family is hard enough to bear on its own, but if there is an inheritance, government legislation can make it worse. The question most people want to know is, “how much will I have to pay in capital gains tax on the sale of the property?”
Governments levy a tax on the sale of real property when it sells for more than the purchase price. The increase in value is known as a “capital gain.” If the property is in New York, the IRS, New York City, and New York State tax that gain. The tax payable can add up to more than 35% of the gain.
Roman Aminov, a New York estate probate lawyer, sees this question a lot. Here is an example of a situation he encounters.
Peter buys an investment property in 2010, and pays $150,000. In January 2015, he sells it for fair market value, $400,000. The capital gain is $250,000, and the capital gains tax is levied on the $250,000 gain. Using that same example property, suppose John died in January 2015, and his son inherited that property, and held it for two years. If the property was then sold in 2017, for $450,000, the calculation is completely different.
This is where the good news comes for beneficiaries of inherited property. Mr. Aminov says that when property is inherited, whether through a will, intestacy, or through many types of trusts, the basis is stepped up. That means the taxable gain is only $50,000, not $300,000, as many people expect.
Although there are some exceptions, federal tax code (see IRC 1014 for details) rules that the tax basis of a property passing to a beneficiary is the fair market value at the date of the decedents death.
Even better for beneficiaries is the fast that certain expenses relating to the sale of the real estate further step-up the basis for tax purposes. Mr. Aminov notes that the tax basis is the starting point for determining capital gains tax.
Looking back at the example given earlier, if the brokers fee for selling the $450,000 property was $20,000 and real estate transfer tax was $20,000 the actual gain would only be $10,000. Obviously these numbers are only an example.
Mr Aminov suggests that parents considering gifting their real estate to their children while still alive, consult an experienced estate planning attorney, working with an estate accountant first. This type of gift is a bad idea for many reasons, especially financial. The gift prior to death would mean the children take on the parent’s tax basis. That means a very large tax bill, especially if the home is worth more than $1 million.
The estate planning attorney and estate accountant can review the client’s exact situation and make recommendations to minimize taxes, including estate tax, income tax, and capital gains tax. More information about this as available at the address below.
Law Offices Of Roman Aminov- NYC Estate Probate Lawyer 260 Madison Ave #204, New York, NY 10021 (212) 201-9299 http://www.aminovlaw.com
Law Offices Of Roman Aminov 147-17 Union Tpke, Flushing, NY 11367 (347) 766-2685