Information about inherited property
The 'base' of a house's value is usually the amount you paid to buy the house, plus the cost of any repairs or improvements made since then. However, inherited homes have a 'stepped-up' basis as the person who inherited it did not pay for it. The stepped-up basis for inherited homes is the estimated current value of the home. This figure is used to determine whether you have gains or losses on the sale of the house.
If you have losses above a certain amount, you will not be able to deduct the full amount in a given year. However, you can deduct the maximum amount possible each year until you have deducted all the losses.
Remember that governing bodies such as HMRC will be very alert to possible fraud situations. If you sell the house at a loss to another member of your family, they will look at the situation more closely, as this is a common way to commit tax fraud.
This means that you cannot 'give' the house to a family member at less than its value in order to claim a loss and avoid paying tax on the gain. Although there is no rule against giving inherited property to someone, you cannot do so without paying the appropriate taxes.
Tax exclusions for selling inherited property
Even though gifting the house is not a good way to avoid tax, there are some legal tax exclusions that may be useful to you.
Tax exclusion for the sale of a house. The home sale tax exclusion is one of the most generous tax exclusion rules. This exclusion allows you to avoid paying tax on gains from the sale of a home up to a certain amount, if two people file a joint return.
This means that unless you have made massive gains on the sale of your home, you probably won't have to pay tax on that amount. However, the precondition is that you must have lived in the house as your main residence for at least two of the five years before it was sold. This means that inherited homes can only benefit from the exclusion after they have been lived in for a certain period of time.
However, the good news is that the basis of your inherited home is its current value. It's unlikely you'll sell it for much more than that (unless you wait a few years), so you don't need the Home Sales Tax exclusion.
Deductions for improvements
In this guide, Heritage International Properties Ltd gives you the information you need to navigate the sale of inherited property. If you intend to turn your inherited property into a valuable fund, read on!
If I sell my inherited property, is it taxed?
Let's start with the basics. Is the sale of an inherited property taxable? Sometimes the answer is yes.
In short, it depends on whether the sale is considered a 'gain' or a 'loss'. If you have made a gain or earned money on the sale, you will have to pay tax on the amount of that gain, but if you can show that you have lost money on the sale, you will get a tax deduction.
However, if you are worried about paying tax before you sell, you will be pleased to know that this is not a problem.
Normally, the tax is paid before the property is distributed to you, so it is not your responsibility and there is a good chance that the tax will not apply anyway. Normally, properties worth more than a certain amount (the exact amount depends on the year) are subject to tax. (You will need to consult your lawyer about this to be sure).
Taxes that apply to inherited property
Now that you have an overview, let's take a closer look at the taxes that apply to inherited property.
Capital gains and losses As mentioned above, you will often be taxed if you have made money on the sale, and deducted if you have lost money.
The tax rules on capital gains and losses apply to anything you sell to make money, including stocks, shares, cars and property. When it comes to inherited property, the tax rules apply in specific ways.
If you want to take advantage of the lower tax rates, you will usually have to hold the property for at least a year. But things change if you live in the house before the sale, as it then becomes a personal property. If you sell a personal property, any losses will not be deductible on your tax return. This is something to think about before you move into an inherited home.
To determine the amount of your loss or gain, you will use what is known as the 'basis' of the inherited home. But because you did not buy the house at a fixed value, determining the basis is a little different when dealing with inherited property.
Determining the basis
You may decide to wait and make improvements to your home before selling it. This is another good way to get tax benefits.
The money you invest in these improvements is deducted from the total amount of capital gains, which reduces the amount taxable. This means that paying for home repairs is actually a good way to make more money in the long run.
How to sell an inherited property.
Now that you know the answer to the question "If I sell an inherited property, is it taxable?", you are ready to move forward with the sale.
With this in mind, selling an inherited property is essentially the same as selling any house. The process can be difficult, depending on where you live and how much time you have.
Need help selling your inherited home? Then give us a call, Heritage International Properties Ltd - find out more about what we sell here. We also have professional financial experts for foreign exchange companies to help you get the best exchange rates. To find out more, call our office.