The tax consequences when selling a house inherited in Texas can be hard to understand and untangle much of the time.
The laws pertaining to this may seem simple, but get complicated when you include all the legal conditions and nuances. To put it simply, if you made gains, you’ll owe taxes, and if you had a loss, you may have a tax deduction.
Then it becomes complicated, because whether you made a profit or had a loss depends on when the decedent died, and the use you made of the house.
What Are the Tax Consequences When Selling a House Inherited in Texas?
Capital Gains or Losses Taxes
The tax consequences when selling a house inherited in Texas include being subject to capital gains taxes. Capital gains or losses stem from the sale of items you use for personal or investment purposes, such as stocks or a house. The sale of an inherited house in Texas is treated as a capital gain or loss for income tax purposes.
The catch with selling an inherited house is that a gain or loss is considered a long-term gain or loss. Further, losses on personal property cannot be claimed as a tax deduction. So if you ever used the inherited house as your personal home, it became personal property, and you can’t deduct a loss if you sell it.
Reporting the Inherited House
In some cases, the executor has to file an estate tax return to report the inherited house. This only needs to happen if the estate surpasses the inflation-adjusted exemption amount.
The determination of the gain or loss on a house sale depends on the “basis” of the house. As the basis goes higher, the taxable gain from a sale decreases. There are, however, different rules for the sale of an inherited house that allow for a special stepped-up basis.
Generally, the basis is what the fair market value was on the date of the decedent’s death. This means that the capital gains taxes you owe are not what the decedent paid for the house, but is based on gains above the property’s value at the time of the decedent’s death.
If it sells for less than what the fair market value was at the time of death, and you never lived in the house, then you have a deductible loss. Know that only $3,000 of such losses can be deducted each year against your ordinary income. Anything above that $3,000 will have to be carried over as deductions in future years.
Reporting Sale of the Inherited House
When you sell an inherited house, you have to report the sale (and gains or losses) when you file your income tax return. To calculate the gain or loss, subtract the basis from what you received for the sale.
To report the gain or loss, you need to use the standard document for this purpose, the IRS Schedule D. You also have to include the gain or loss on your personal Form 1040 tax return. And make sure you use the Form 1040 (and not the Form 1040A or Form 1040EZ) for the year in which you sold the inherited house.
The tax consequences when selling a house inherited in Texas can be complex and difficult to understand at best.It’s usually a good idea to find a professional to help you navigate the tax waters.
We’re ready to help you reach your real estate goals and will be glad to answer any and all questions. Contact us by phone at (281) 937-3780 or fill out the online form.