How Do I Avoid Capital Gains Tax on an Inherited Property? – Tips from Tony Buys Homes
Inheriting a property brings not only a valuable asset but also the responsibility of dealing with potential taxes. One of the significant concerns is the capital gains tax that can be levied on the sale of inherited property. At Tony Buys Homes, a 5-star rated and fully insured real estate wholesaler and cash home buyer in Illinois & Chicagoland, we’ve gathered over 15 years of experience in navigating these financial waters. Here’s our advice on how to minimize or avoid capital gains tax on an inherited property.
Understanding Capital Gains Tax
What is Capital Gains Tax?
Capital gains tax is a tax on the profit made from selling an asset like a property. It’s calculated based on the difference between the selling price and the original purchase price, or in the case of inherited property, its fair market value at the time of inheritance.
Step-Up in Basis
The Key to Minimizing Taxes
The ‘step-up in basis’ is crucial in reducing potential capital gains tax. This rule adjusts the property’s basis from the original purchase price to its market value at the time of the previous owner’s death. This means if you sell the property, the taxable gain is calculated based on its value at the time you inherited it, not what the original owner paid.
Selling the Property
To minimize capital gains tax, consider selling the property as soon as possible after inheriting it. The closer the sale is to the date of inheritance, the less likely there will be a significant increase in its value, reducing potential capital gains.
Living in the Property
Turning It into Your Primary Residence
If you live in the property for at least two out of the five years before selling it, you may qualify for an exclusion. For individuals, up to $250,000 of capital gains on real estate can be exempted if it’s your primary residence, and up to $500,000 for married couples filing jointly.
Consider a 1031 Exchange
Investing in Another Property
A 1031 exchange allows you to defer paying capital gains tax if you reinvest the proceeds from the sale into another property. This strategy can be complex, so professional advice is crucial.
The Role of Tony Buys Homes
Simplifying the Process
At Tony Buys Homes, we understand the complexities involved in dealing with inherited properties. If you decide to sell, we offer a fast, straightforward process, buying homes for cash, which can help you avoid the hassles of the traditional selling process.
No Hidden Fees or Commissions
We operate with full transparency, ensuring there are no hidden costs. This clarity is essential when managing financial obligations related to inherited properties.
Consult with Tax Professionals
Professional Advice is Key
While we can offer general advice, consulting with a tax professional is crucial for personalized guidance tailored to your specific situation. They can help you understand all your options and the implications of each.
Inheriting a property can be a financial boon, but it comes with its tax implications. Understanding the step-up in basis, considering the timing of the sale, possibly using the property as your primary residence, or exploring a 1031 exchange are all strategies that can help minimize capital gains tax. At Tony Buys Homes, we’re here to help make the process of selling your inherited property as straightforward and beneficial as possible. For more tailored advice, especially regarding tax implications, always consult with a tax professional. Reach out to us to discuss how we can assist you with your inherited property in Illinois & Chicagoland.