Selling property you own can trigger capital gains tax, even if you inherited it. You typically need to know your original cost of the property in order to calculate a capital gain. Because you didn’t spend anything for inherited property, a different amount called a “basis” is used. Selling something for more than basis is taxable. If you sell for less than the basis, you only report a deductible loss for some types of property.
Capital Gains on Inherited Property
An inherited asset you sell for more than the basis is taxed as a capital gain, including investments and personal property. Taxable gains occur from selling stocks and bonds, as well as collections like stamps and coins. Even household furnishings are subject to capital gains tax. Selling business property that you depreciated for tax purposes after inheritance triggers ordinary income tax, along with capital gains tax.
Your basis of inherited property is usually the property's value on the date of death for the person who bequeathed it to you. However, if the personal representative of the estate chose to use an alternative valuation date, your basis is the property value on that date. The value for property, such as stocks or mutual funds, is the market price. For other types of property, the value is listed on the federal estate tax return or state inheritance tax schedule.
Exceptions to Capital Gains Tax on Inherited Real Estate
Your capital gains on the sale of inherited real estate may be reduced in two circumstances. First, if you rented out the property and did not use it as your principal residence, your profits to the extent of any depreciation you claimed is taxed as ordinary income rather than as a capital gain. Second, if you used the property as your principal residence for two of the last five years, you can exclude up to a certain dollar amount in gains, as set forth below (although if you sell the house for less than the basis, you cannot deduct the loss if the property is your personal residence).
Importantly, you cannot report the loss from selling any personal property, such as household goods or an automobile, to deduct against gains on selling the home. Losses on these types of property are not deductible against gains from selling other property. You also cannot deduct a loss from the sale of the house unless it was an income property. No deduction is granted for a loss from selling a house used as your personal residence.
2018 Capital Gains Tax
The capital gains tax structure did not change with the Tax Cuts & Jobs Act, which was signed into law in December 2017 and takes effect beginning with the 2018 tax year (for which you file your taxes in 2019). As before, capital gains are taxed at 0 percent, 15 percent or 20 percent depending on your tax bracket. However, the tax brackets themselves have changed, so your capital gains tax will change accordingly.
If you're a single person, for example, long-term capital gains are taxed as follows:
- 0 percent if you make $38,600 or less in total income
- 15 percent if your total income is between $38,600 and $425,800
- 20 percent if your total income is over $425,800
Short-term capital gains are taxed at your regular income rate.
2017 Capital Gains Tax
For the 2017 tax year (tax returns due in 2018), the capital gains rates were also 0 percent, 15 percent and 20 percent. However, as the brackets have adjusted, the dollar amounts have as well.
If you're a single person, your long-term capital gains are taxed for 2017 as follows:
- 0 percent if you make $37,950 or less in total income
- 15 percent if your total income is between $37,950 and $418,400
- 20 percent if your total income is over $418,400