If you inherited a property last year in Minneapolis, you probably have many questions about what that means for you. You might think it’ll be a net income for you to sell a property you didn't buy.
However, capital gains tax could put a dent in your profits! These taxes are calculated on properties when the original purchase price and the price you can sell the property for are sizable. When the difference between these two amounts proves to be a profit for you, the IRS taxes it as additional income.
If you’re unfamiliar with how this type of tax works with inherited property and what you can do to get the best results when selling a property given to you, read on for more details.
Capital Gains tax can occur when property is sold for more than its purchase price. However, the tax doesn't apply in all situations. With an inherited property, the new owner wouldn't pay the tax upon inheriting the property. Instead, the tax would likely apply if you sold the property for a profit.
In addition, when understanding capital gains, it’s essential to know that there are different taxes based on the length of time you’ve had the underlying asset.
This tax would apply to an asset you've owned for less than a year. So, suppose you inherited the property recently (within the past year). In that case, the rate is different from long-term capital gains tax.
Short-term capital gains tax is calculated using your ordinary income tax rate, also known as your tax bracket.
The long-term capital gains tax applies to assets you've owned for more than a year. The rates for these assets are less than the short-term ones. The amount of the tax is based on your filing status and income.
Some people may not have to pay any taxes if they qualify. Others could pay anything from 15% to 20% depending on their filing status and tax bracket.
You might be concerned about the potential tax liability if you inherited a Minneapolis property. Fortunately, there are some calculations to help you estimate the potential amount you could owe.
You may be able to claim capital loss deductions on your taxes, which will help with the tax liability. This occurs if you sell the house but put money into it beforehand.
In other words, suppose you inherit a property and invest some money into it to upgrade or improve it. Then when you sell the house, you can deduct the money used for home improvements. This will reduce your capital gains and tax liability.
"Stepped up in basis," or "stepped-up basis", is another tax code method that can help owners of inherited properties reduce their tax liability. If the price of the inherited asset on the date of the decedent's death is higher than the original price, the code will raise (step up) the purchase price.
So, the purchase price is stepped up (adjusted) on the date you inherit it, reducing the tax burden. However, you would have to immediately sell the asset to avoid the value rising and accumulated capital gains tax.
There are a few ways to mitigate the tax liability you may incur from inheriting a property. These are as follows.
Some people might decide to simply move into the inherited home. However, if you already have a house you like, this might not be an ideal solution.
If you move into the home, you may need to offload your current house if you have one. Weigh the pros and cons to determine which way is financially beneficial.
If you decide to stay in your current home, you could rent out the other property. However, being a landlord is a big responsibility. You may consider working with a Minneapolis property manager for a more seamless experience.
The last option would be to secure a cash offer on the property. This can be especially helpful if you receive the stepped-up basis adjustment for the tax.
Selling the property alleviates you from the hassles of upkeep, maintenance, and capital gains tax. When you sell the home quickly, ensure that you work with a reputable company that will give you a fair deal. Homefield Homebuyers can help!
If you choose to sell your inherited property quickly, HomeField Homebuyers is your local resource for securing a cash offer. We’ll give you a fair offer for the property and help you avoid a large capital gains tax bill. Reach out to our team and we'll deliver a fair offer within 48 hours or we'll send you $100!