Do I Pay Taxes When I Inherit?

Capital gains taxes are then calculated, so you pay taxes only on appreciation that occurs after you inherit the property. Yahoo Finance’s recent article entitled, “Do I Pay Taxes Automatically If I Inherit Property?” says there are three main types of taxes that cover inheritances:

Inheritance taxes are taxes that an heir pays on the value of an estate that they inherit. There are no federal inheritance taxes. However, six states have an inheritance tax.
Estate taxes are taxes paid out of the estate before anyone inherits. The estate tax has a minimum threshold, and as with all other tax brackets, the government only taxes the amount that exceeds this minimum threshold, which is $12.92 million ($25.84 million per married couple).
Capital gains taxes are taxes paid on the appreciation of any assets an heir inherits through an estate. They’re only levied when you sell the assets for gain, not when you inherit.

The cash you inherit is taxed through either inheritance taxes (when applicable) or estate taxes. With inheritance taxes, you must file and pay this tax.

With an estate tax, the IRS taxes the estate directly.

Therefore, it’s uncommon for an heir to owe any taxes, including income tax, on inherited cash.

The IRS does not automatically tax any other forms of property that you might inherit. However, you’ll owe capital gains taxes if you choose to sell this property.

When you inherit property, whether real estate, securities, or almost anything else, the IRS applies a stepped-up basis to that asset. This means that for tax purposes, the base price of the asset is reset to its value on the day that you inherited it. If you inherit property and immediately sell it, you’d owe no taxes on those assets.

Two prices are involved in establishing a capital gain tax: the sale price (how much you sold the asset for) and the original cost basis (how much you bought it for).

Reference: Yahoo Finance (Aug. 27, 2023) “Do I Pay Taxes Automatically If I Inherit Property?”

What Should We Do with an Inherited Home?

Inheriting a house with siblings can raise some financial issues about what it means for each of you. Let’s look at some options for handling this situation and possible responses to any differences of opinion that may emerge.

NASDAQ’s recent article, “What to Do When Inheriting a House With Siblings,” says that consulting with an estate planning attorney can help untangle some of the sticky issues that can arise when a home is left to multiple people.

Several siblings can inherit the same piece of property, and when siblings inherit a home, everyone’s typically entitled to an equal share of the property. So, there are a few essential things you might need to do, including:

Putting the utility services in your or your siblings’ names;
Contacting the post office to have your parents’ mail forwarded to your address;
Going through your parents’ belongings;
Taking care of any necessary maintenance or repairs;
Updating payment information for the home’s insurance policy; and
Paying any outstanding charges associated with the home, such as HOA fees or property taxes.

After that, here’s what you might consider doing with the inherited property.

Sell. Selling is an obvious choice if neither you nor your siblings plan to live in it. Sell the home and divide the proceeds.

Buyout. If a sibling is reluctant to sell or your parents’ wills bar you from selling, you could try to work out a buyout. In that scenario, one sibling would maintain ownership of the home and pay the others an amount equal to what their share of the home is worth. Getting the home professionally appraised to determine its value is a good idea.

Renting. A third option is to rent out the home. The upside of this option is collectively sharing in the rental income from the property. This might make sense if you think you might revisit the issue of selling or a buyout in the future or if you’re obligated to keep the home in the family. If you go this route, you and your siblings will need to decide how maintenance and rent collection will be handled, and it might make sense to agree to hire a property management company to help.

Reference: NASDAQ (April 12, 2023) “What to Do When Inheriting a House With Siblings”

Searching for Lower Taxes? Check State Laws

If you are among the many Americans making a move because of economics, a recent article from MarketWatch titled “Thinking about moving to a state with lower taxes? These are the mistake to avoid” has the information you need about the tax impact of your prospective new home state.

Moving to a state with no personal income tax is not the quick and easy answer it seems. You’ve got to look at ALL the taxes that apply to residents, from property taxes to estate and inheritance taxes.

Here’s a good example: Texas has no personal state income tax. Colorado has a flat 4.63% personal state income tax. Therefore, if you are working and have a good income, it makes sense that Texas would be your best option, right? Wrong.

The property tax rate on a home in some Colorado Springs neighborhoods is about 0.49% of the property’s actual value. Let’s say you move to one of these areas and buy a home for $500,000. Your annual property tax bill: $2,450. Let’s say your taxable income is $200,000. Your Colorado state income tax bill would be $9,260, and with the property tax, your tax bill would be $11,710. For that same $500,000 home in Dallas—your property tax would be $21,200 or about $17,800 if you are over age 65 or a surviving spouse. The higher property tax means that your annual tax bill is lower in Colorado.

What about after you die? Seventeen states and the District of Columbia impose their own estate tax or inheritance tax, and Maryland imposes both. Exemptions from the state estate tax are way below the current federal estate tax exemption. However, if you move to the wrong state, your estate could shrink dramatically from the state’s death taxes.

To clarify, an estate tax is charged against the entire taxable estate, regardless of who inherits from the estate. An inheritance tax is charged against people who receive inheritance. The rate usually depends upon their relationship to you.

Here are a few state estate taxes to consider:

Connecticut’s top estate tax rate is 12%, with a $5.1 million exemption allowed for 2020. The exemption increases to $7.1 million in 2021, and $9.1 million in 2022. Above $15 million of the estate tax value, the tax rate drops to 0%.
Hawaii’s top estate tax rate is 20%, and in 2020, there is a $5.49 million exemption.
In Illinois, the top tax rate is 16%, with a $4 million exemption in 2020.

Review the entire tax picture, before making this important decision. You should also confer with your estate planning attorney to learn how your estate’s structure—trusts and other estate planning tools—would work in a different state. Keep in mind that all of these tax exemptions, including the federal one, are likely to change as local, state and federal governments respond to the increased costs and lowered revenues brought about by the COVID-19 pandemic.

Reference: MarketWatch (Aug. 30, 2020) “Thinking about moving to a state with lower taxes? These are the mistake to avoid”

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