For many, inheriting a home can be a walking paradox to experience: overnight, you are left with property of sizable value you can use to improve your life while still also processing and mourning the loss of a loved one. For those who are pondering the next best move to make in this situation, understanding the tax consequences when selling an inherited property can absolutely inform your ultimate decision on how to handle the property itself. Thankfully, tax laws have been designed in such a way not add additional burden upon the person inheriting the property. Typically, the financial consequences are less daunting than what you would expect, which is good news for you.
When selling a single-family home in Texas, understanding capital gains taxes is crucial to planning and maximizing profits. Capital gains tax is the tax imposed on the profit earned from selling an asset, including real estate, if the selling price exceeds the original purchase price. In real estate, capital gains taxes are determined by the duration of ownership, exemptions, and the seller’s income bracket.
If you have owned the property for over a year, the gain is considered a long-term capital gain, which is subject to lower tax rates compared to short-term capital gains (those realized from sales within a year of purchase). Long-term capital gains tax rates vary from 0% to 20%, depending on income level. The federal rate for most sellers will fall between 15% and 20%, while Texas, notably, does not impose any additional state income tax, making it favorable for sellers.
However, you may qualify for significant exclusions that could eliminate or reduce capital gains taxes. The primary residence exclusion allows individuals to exclude up to $250,000 ($500,000 for married couples filing jointly) of capital gains if specific criteria are met. To qualify, the property must have been your primary residence for at least two of the past five years. This exemption can be applied once every two years. For instance, if you bought a home for $300,000 and sold it for $600,000, your $300,000 gain would be exempt from capital gains tax, provided you qualify for the $250,000 or $500,000 exclusion.
If the profit exceeds the exclusion threshold, you will only pay capital gains tax on the amount over the exclusion. For instance, if a couple makes a $600,000 profit, they would only pay capital gains tax on the $100,000 remaining after the $500,000 exemption.
Certain scenarios, like job relocations, health issues, or unforeseen circumstances, may qualify you for a partial exclusion if you haven’t met the two-year residency requirement.
Reporting the sale involves filling out IRS Form 1099-S if there are taxable gains, which helps the IRS track the transaction. In cases of full exclusion eligibility, some sellers may not receive this form as there would be no taxable event.
For complex situations, consulting a tax advisor or real estate professional can provide guidance tailored to your financial situation, helping you make informed decisions to minimize capital gains tax impact.
Tax Consequences when selling a house I inherited in Texas, TX
Calculation of basis
In order to better understand how you’ll be taxed having inherited a home, you need to know how basis is calculated. In this case, basis refers to the asset cost for purpose of the calculation of capital gains along other taxes. When a person dies, the value or basis of their property in Texas is increased to the market value as at the time of their death. For instance, if a person purchased a home 20 years ago for $25,000 but it was worth $100,000 at the time of their death, that property would be valued at the latter amount for the purpose of calculating capital gains.
Taxation of gains/losses
Capital gains or losses refer to what you earn from selling property that you use for either personal or investment purposes. Such can be houses, furniture and many more things. If you decide to sell an inherited home in Texas, that sale is regarded as capital gain or loss for the purpose of income tax. In most cases, for you to qualify for lower rates of long-term capital gains, you are required to have held that property for at least a year. However long the duration you have been in ownership of an inherited home, any gain or loss will still be treated as long-term.
Reporting the sale
Upon selling an inherited home, you have to report it for the income tax purposes. You should first calculate your capital gain or loss. This is done by subtracting the basis from the sale amount. You should then report that amount to the necessary authorities.
Having an inherited home can be stressing given the fact that you have new property to take care of and pay taxes for it at the same time… You should go through the probate process in Texas as the first step to selling your home. The court will then authorize you to proceed as you wish. If there are any other individuals involved in the inheritance, you should first agree with each other on that decision. You can then file a petition requesting the court to allow you to sell the property.
You should then consider how much tax you are to pay. This will be paid against the capital gains or losses resulting from the sale of the house. You can call Starfish Group Properties now at 817-859-6677 to undertake a smooth and legitimate sale of your home. We are local here in Texas TX and we know the market here better than anyone else. If you are still asking yourself what are the tax consequences when selling a house I inherited in Texas, then we would be happy to discuss it with you in more detail.
Selling an inherited house can relieve you of quite a burden. In addition to that, selling the property to an investor is a basic simple and fast process. Contact us for inquiries on how to go about things when selling your home in Texas and we will be glad to help you.