How Do I Avoid or Minimize My Liability for Taxes on Inherited Property?
Full Question:
Answer:
Under Internal Revenue Code § 1014(a) the general rule applied to property a beneficiary receives from a benefactor is that the beneficiary's basis equals the fair market value of the property at the time the decedent dies. For example, if the deceased originally purchased a home for $35,000, her basis in the home is equal to its cost, $35,000, assuming no adjustments under IRC § 1016. When the decedent dies, the fair market value of the home is $100,000. If the home is inherited at death, the beneficiary's basis in the home will be the fair market value, $100,000. However, if the Decedent had given the home to the beneficiary before her death, the beneficiary would receive a carryover basis, which would be equal to the decedent's adjusted basis in the home, $35,000.
"Property acquired from the decedent" under IRC § 1014(b) generally includes property acquired by bequest, devise or inheritance, property the decedent gives to his or her estate, and certain revocable trusts. Inherited property can involve many different tax implications. If you sell for the amount the estate valued it at, you might not owe any taxes. If the property has appreciated, you will have to pay capital gains tax -- unless you used it as a primary residence. With investment property, you may be able to use a 1031 exchange.
Inheritance taxes are taxes levied on the value of an estate when it is passed to heirs upon the death of its owner. They do not apply to transfers made while the owner is alive.
Gift taxes are taxes that supplement the Estate Tax. Gift taxes are placed on gifts given away to any person while you are still living, so that you may not avoid estate taxes by making gifts of your estate. Any transfer to an individual, either directly or indirectly, where fair market value is not received in return is considered a gift. The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. Generally, the following gifts are not federally taxable gifts:
-Gifts that are not more than the annual exclusion for the calendar year.
-Tuition or medical expenses you pay for someone (the educational and medical exclusions).
-Gifts to your spouse.
-Gifts to a political organization for its use.
There are many manners of accomplishing tax savings, such as a life estate deed, trust, and will. The best method of transfer depends on the income, assets, and circumstances in the situation of each person involved. We are prohibited from giving legal advice, as this service provides information of a general legal nature. We suggest you contact a local attorney or tax professional who can review all the facts and documents involved.
