The tax consequences when selling a house inherited in Omaha can be difficult to understand. This piece reviews some of the key topics you need to know.
At a superficial level, the tax laws for selling an inherited house are pretty simple–if you have a capital gain (an increase in the value of the property), you will owe taxes. Like everything related to the law, it gets complicated quickly with many special situations. You’ll want to understand the most important nuances before you make any big decisions, like moving into the house.
We’ll explain some of the complications in this article, such as determining if you had a profit or loss based on when the decedent died and how your use of the house impacts your taxes.
What Are the Tax Consequences When Selling a House Inherited in Omaha?
First, Understand Your Basis
Basis is an accounting term that refers to the value of a property when you acquire it. In the case of an inherited house, the basis is usually the fair market value of the house on the date of the decedent’s death (the decedent is the person who passed away and left the property to you as an inheritance). This has important tax consequences because any gains in value before the person dies are never taxed. Essentially, the basis value is reset at their death. You will only owe capital gains taxes on the property’s increased value since the time of the decedent’s death. This is referred to as a stepped-up basis.
Capital Gains or Losses Taxes
The first, and probably most significant tax consequence to consider is capital gains. In short, If the value of the property goes up or down after you receive it, that is a capital gain or capital loss. While your primary residence receives a biannual exemption from capital gains (up to $250,000), additional properties, like an inherited house don’t receive an exemption.
You can expect to pay capital gains taxes when you sell a house inherited in Nebraska. There is an important distinction in tax law between investment and personal property capital gains or losses. That’s important because items in the same category can balance each other out. For example, if you make money on some stocks and sell others at a loss, you might be able to cancel out your capital gains.
If you never lived in the house and if it sells for less than your basis (fair market value at the time of death), then you have a capital loss. The good news is that loss may be deductible. But, unless you have other rental properties or capital gains, you will only be able to deduct $3,000 each year against your ordinary income. Anything above that $3,000 will have to be carried over as deductions in future years. So, a $30,000 loss will give you a tax benefit for a decade.
The next tax complication is long-term and short-term capital gains. When you sell an inherited house it is considered a long-term gain or loss. Here’s the catch: personal property losses cannot be claimed as a tax deduction. If the property was only used as an investment (rented), you are fine. If you used the inherited house as personal property (lived in it), you won’t be able to deduct a loss if you sell it. That may not be a big deal (you received the stepped-up basis and income from the sale), but don’t expect the IRS to give you a deduction for the loss.
Estate taxes on an Inherited House
By the time you receive title to your inherited house, the probate should be complete and all estate taxes should be paid (meaning that all the court stuff is done and the assets are distributed). Estates are generally exempted under federal tax law unless they exceed $11.58 million (in 2020). Only 13 states have an estate tax. The executor may be required to file an estate tax return to report the inherited house. But this is only if the estate exceeds the inflation-adjusted exemption amount. Pay close attention if your state has an estate tax.
Inheritance Taxes on an Inherited House
Inheritance taxes can be a big, unpleasant surprise for an unsuspecting recipient. Only six states have an inheritance tax, but this is very important if you live in one of them. If the property or decedent didn’t live in Nebraska, Iowa, Kentucky, New Jersey, Pennsylvania, or Maryland, you can skip this section. If the property is in one of these six states or the decedent lived in one of these states, you should start looking for an accountant (and pay more attention to who you vote for).
The inheritance tax is generally based on your relationship to the decedent. The spouse will generally have the lowest rate (often 0%), then children, then relatives (niece or nephew), then unrelated persons. For example, a nephew receiving an inherited house in Nebraska should expect to pay a 13% tax on the value of the property over $15,000. Nebraska has the highest inheritance tax rates, topping out at 18%. Hopefully, they also left you with some cash to pay the bills.
Reporting the Sale of an Inherited House
You’ll need to prepare yourself for some extra tax reporting in the year you sell your inherited property. The IRS requires you to report the sale and any gain or loss when you file your income tax return. To calculate the gain or loss, you have to subtract the basis from what you received for the sale.
IRS form Schedule D is used to report capital gains and losses. After you complete the Schedule D, you will copy the totals over to your Form 1040 tax return. If you are using an accountant or tax software, they will handle this for you. If you are doing the paperwork manually, you should know that you won’t be able to use the 1040A or 1040EZ forms for the year you sold your inherited house. The IRS offers a handy reference publication that addresses the tax consequences of selling a home.
Selling a house inherited in Nebraska can be complicated when you consider all the tax consequences. We encourage you to find a tax accountant to help you understand all the intricacies of the law. If you aren’t sure who to talk to, we can refer you to someone with expertise in this area.
