Understanding the Tax Implications of Selling an Inherited House in Illinois
Inheriting a house can be a blessing, but it can also come with its fair share of challenges. One of the most common concerns for those who inherit property is understanding the tax consequences when selling the house. If you’ve recently inherited a house in Illinois and are considering selling it, it’s essential to be aware of the potential tax implications. In this blog post, we’ll discuss the various taxes you may be subject to when selling an inherited house in Illinois and provide some tips on how to minimize your tax liability. At Tony Buys Homes, we specialize in helping homeowners sell their houses fast and with minimal hassle. If you’re looking to sell your inherited house in Illinois, we’re here to help.
Capital Gains Tax on Inherited Property
When you sell an inherited house, one of the primary taxes you’ll need to consider is the capital gains tax. Capital gains tax is a tax on the profit you make when you sell an asset, such as a house, that has increased in value since you acquired it. The amount of capital gains tax you’ll owe depends on the difference between the property’s fair market value at the time of inheritance and the sale price.
Step-Up in Basis
Fortunately, when you inherit a house, you receive a “step-up in basis.” This means that the cost basis of the property is adjusted to its fair market value at the time of the previous owner’s death. This can significantly reduce your capital gains tax liability, as you’ll only be taxed on the increase in value since you inherited the property, rather than the increase in value since the original owner purchased it.
For example, let’s say your parents bought a house in Illinois for $100,000, and at the time of their death, the property was worth $200,000. If you inherit the house and later sell it for $250,000, your capital gains tax liability would be based on the $50,000 increase in value since you inherited the property, rather than the $150,000 increase in value since your parents purchased it.
Calculating Capital Gains Tax
To calculate your capital gains tax liability, you’ll first need to determine your “net capital gain.” This is the difference between the sale price of the property and its adjusted cost basis (the fair market value at the time of inheritance). In the example above, your net capital gain would be $50,000 ($250,000 sale price – $200,000 adjusted cost basis).
Next, you’ll need to determine your capital gains tax rate. In general, the federal capital gains tax rate is 15% for most taxpayers. However, if your taxable income is above certain thresholds, you may be subject to a 20% capital gains tax rate. Additionally, Illinois imposes a state capital gains tax rate of 4.95%.
Using the example above, if you’re subject to the 15% federal capital gains tax rate and the 4.95% Illinois state capital gains tax rate, your total capital gains tax liability would be $9,975 ($50,000 net capital gain x (15% + 4.95%)).
Estate Tax on Inherited Property
In addition to capital gains tax, you may also need to consider the estate tax when selling an inherited house in Illinois. The estate tax is a tax on the transfer of property after someone’s death. Both the federal government and the state of Illinois impose estate taxes, although the federal estate tax only applies to estates above a certain value.
Federal Estate Tax
For 2021, the federal estate tax exemption is $11.7 million per individual. This means that if the total value of the deceased person’s estate (including the inherited house) is less than $11.7 million, no federal estate tax will be owed. If the estate’s value exceeds this threshold, the estate tax rate ranges from 18% to 40%, depending on the amount by which the estate exceeds the exemption.
Illinois Estate Tax
Illinois has its own estate tax, with a lower exemption than the federal estate tax. For 2021, the Illinois estate tax exemption is $4 million per individual. If the total value of the deceased person’s estate (including the inherited house) is less than $4 million, no Illinois estate tax will be owed. If the estate’s value exceeds this threshold, the Illinois estate tax rate ranges from 0.8% to 16%, depending on the amount by which the estate exceeds the exemption.
It’s important to note that the estate tax is typically paid by the estate itself, rather than the individual inheriting the property. However, if the estate does not have sufficient funds to cover the estate tax liability, the beneficiaries may be responsible for paying the tax.
Tips for Minimizing Tax Liability When Selling an Inherited House
While it’s impossible to avoid taxes entirely when selling an inherited house in Illinois, there are some strategies you can use to minimize your tax liability:
1. Hold onto the property for at least one year: If you sell an inherited house within one year of the previous owner’s death, any capital gains will be considered short-term capital gains, which are taxed at a higher rate than long-term capital gains. By holding onto the property for at least one year, you can take advantage of the lower long-term capital gains tax rate.
2. Make improvements to the property: If you make improvements to the inherited house before selling it, you can increase its cost basis, which will reduce your capital gains tax liability. Just be sure to keep detailed records of any improvements you make, as you’ll need to provide documentation to the IRS if you’re audited.
3. Consult with a tax professional: Navigating the tax implications of selling an inherited house can be complex, so it’s a good idea to consult with a tax professional who can help you understand your specific situation and provide guidance on how to minimize your tax liability.
At Tony Buys Homes, we understand that selling an inherited house can be a stressful and emotional process. Our team is here to help you navigate the process and ensure that you get the best possible outcome. If you’re looking to sell your inherited house in Illinois, don’t hesitate to reach out to us for a no-obligation consultation.