Capital Gains Rules When Inheriting A House

Before answering the question as to what the rules are concerning capital gains for inherited property it is a good idea to understand what capital gains are. Capital gains are the gains (profit) realized from the sale of capital assets, which themselves are assets (comprising of property, plant and equipment) and intangible properties that have economic lives extending beyond the accounting period. Generally, capital gains are the difference between the cost of the asset and the assets selling price, minus certain deductible expenses.

When children (including adult siblings) inherit a property, the Internal Revenue Service (IRS) determines their basis (the difference between the cash price and futures price) in the property on the date of the owners death.

Cost Basis

The cost basis is not the amount the owner originally paid for the house, but the propertys fair-market value on the date of the parents death. Cost basis is therefore a tax word for the cash amount assigned to a property at the time it is acquired, for the reason of determining profit or loss when it is eventually sold.

Using an example to explain the idea behind the ruling, if a person has four children, who inherit a property and one of the four siblings sold their share of the property he or she must pay capital gains tax for whatever profit made over one-quarter of the new basis.

Other Tax Consequences

Other tax consequences that are relevant to inheritance include estate taxes. For the inheritance to be taxed with the estate tax, the estate must total $675,000 or more, as the Internal Revenue Service allows residents to pass on property, cash and other assets worth up to a total of $675,000 before charging the heirs any taxes. This figure of $675,000 has been rising each year since 2001 and will do so for the next several years, so you should check with a tax advisor or accountant before selling an inheritance.