The proceeds from a sale of inherited property may be considered taxable income. In order to determine if this sale is indeed taxable, a taxpayer must first determine their basis in the property. This is usually calculated in one of two ways, either the fair market value of the property at the date of the decedent’s death or the fair market value of the property on an alternate date if the executor of the decedent’s estate uses a permissible alternate valuation. The easiest way to determine these values is simply to contact the executor and ask about the fair market value. In addition, there are specific circumstances where the executor is required to provide a statement with this information to the person who receives the property.
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After this information is received, and the property is sold, the proceeds of the sale are taxable if the property is sold for more than the basis. Regardless of whether the proceeds are taxable or not, the sale must be reported on Schedule D of Form 1040, Capital Gains and Losses, and on Form 8949, entitled Sales and Other Dispositions of Capital Assets. Penalties may be applied if the taxpayer is inaccurate in their calculations of the basis.
If the decedent passed away in 2010, the executor may elect out of the above estate tax rules and use a modified version of the rules. If the executor does so, the basis may be the lessor of the property’s fair market value on the date of death or the decedent’s adjusted basis. The executor may increase the basis in select circumstances by up to 1.3 million dollars, but this basis can’t exceed the property’s fair market value on the date of decedent’s death.
In addition, the executor may increase the property’s basis by up to 3 million dollars that is inherited by the decedent’s spouse, but again, this basis can’t exceed the property’s fair market value on the date of decedent’s death. In any of the above 2010 exceptions, the executor is required to provide a statement with this information to the person who receives the property.
Proper communication between the person inheriting the property and the executor is vital in ensuring the basis is properly calculated, all necessary taxes paid, and penalties from the IRS are averted.
If you have any questions regarding your tax obligations based on gifted inheritance, please contact our professional accountants and tax preparers today!