What Happens to Tax Basis When Selling Inherited Property?

Question from Peaches, What Happens to Tax Basis When Selling Inherited Property?

Answer from AI:

When you inherit a property, such as your mother’s house in California, you typically receive a “stepped-up” tax basis. This means the property’s tax basis is adjusted to its fair market value at the time of the original owner’s death. This can significantly affect the capital gains tax you might owe if you decide to sell the property.

Understanding Stepped-Up Basis

The stepped-up basis is crucial because it determines the taxable gain when you sell the property. Here’s how it generally works:

• If you sell the inherited property, the capital gains tax is calculated based on the difference between the sale price and the stepped-up basis.
• This can potentially reduce the taxable gain, as the basis is often higher than the original purchase price.

For more detailed information, you can refer to the IRS guidelines on Capital Gains and Losses.

Transferring Tax Basis to a New Property

In California, Proposition 19 allows certain homeowners to transfer their tax basis to a new home under specific conditions. However, this typically applies to property taxes, not the capital gains tax basis.

Key Points of Proposition 19:

1. Eligible homeowners (such as those over 55, severely disabled, or victims of a natural disaster) can transfer their property tax basis to a new home of equal or lesser value.
2. This transfer can be done up to three times.

For more details, you can review the California Board of Equalization’s Proposition 19 Information.

Renting Out the New Property

If you decide to rent out the new property after purchasing it, several tax implications arise:

• The property is now considered an investment property, which means you can deduct certain expenses related to the rental activity.
• Depreciation can be claimed on the property, which affects your taxable income.
• When you eventually sell the rental property, the capital gains tax will be calculated based on the adjusted basis, which includes depreciation recapture.

Consulting a Legal Professional

Given the complexity of tax laws and the potential financial impact, it’s advisable to consult with a tax professional or attorney. They can provide personalized advice based on your specific situation and help you navigate the intricacies of tax basis, capital gains, and rental property taxation.

For further reading, you might explore resources like the IRS Publication 527 on Residential Rental Property.

Remember, while this information provides a general overview, individual circumstances can vary significantly, and professional guidance is often necessary to ensure compliance and optimize tax outcomes.