As the trustee for your mother’s revocable trust, you’re planning to sell her house and distribute the proceeds after her passing. Your younger brother currently resides in the California home, taking care of her.
The house is neglected but has appreciated approximately $700,000 over 40 years while held in the trust. Will it be subject to capital gains taxes?
Yes, you may face capital gains taxes despite inheriting the home at market value. However, you could avoid being slapped with a hefty tax bill.
After your mother’s passing, you and your brother will inherit the house at its current market value, thanks to a “step-up basis” transfer of assets between beneficiaries.
Understanding Capital Gains Tax on Inherited Homes
If you’ve inherited a home after the passing of a loved one, you might be wondering about the tax implications of selling it. According to Karen Fierro, partner of trusts and estates at Wiss & Co., an accounting firm based in Florham Park, N.J., your “capital gain” will be the difference between the sale price and the home’s value at the time of your mom’s death.
However, expenses incurred when selling the home, such as commissions paid to a real-estate agent, can reduce the capital gain. Additionally, if you sell the home within a few months of inheriting it, the sales price is considered to be the same as the value at the time of inheritance. This means that even if the home has appreciated in value considerably over the last 40 years, you may not have to pay much in taxes on any gains.
It’s worth noting that capital gains tax only applies to the appreciation in value after you take ownership of the property. So if you wait before selling, you might end up paying more in taxes if the home appreciates further.