If you have inherited the family homestead, there may be a number of different taxes that have to be paid depending on how the estate was structured and what state the decedent resided in.
When a family’s home is sold and proceeds are divided between the siblings, it’s not likely the house sale will rise to the level of today’s federal estate and gift tax exemption of $11.4 million. However, there may be income taxes due.
In answer to the question “I inherited my father’s home. Do I owe any kind of taxes?” nj.com reports that New Jersey residents who die on or after January 1, 2018, are no longer subject to a New Jersey estate tax and children are exempt from the inheritance tax. The proceeds from the sale of the house will be subject to income tax, but it’s not likely a person would incur the tax because income tax is paid on the difference between the sales price and the basis of the asset minus costs of the sale.
“Basis” is generally defined as the purchase price plus the cost of improvements.
Assets owned by a decedent receive a “step-up” or a “step-down” in basis to the value as of the date of death.
This means that a sibling inheriting a parent’s home and then selling it would only be taxed on the difference between the sales price and the value at the date of death, less selling costs, assuming the parent owned 100% of the home at the time of his death.
If this difference between date of death and sale values is substantial, the adult child would incur a tax, typically at capital gains rates. However, as a general rule, there’s little or no gain to tax.
Just in case there’s an income tax audit in the future, the executor and the heirs should be careful to keep evidence of the date of death value of the parent’s home.
An estate planning attorney can help the family review the tax situation to be sure that everything is done properly so there are no surprises ahead.
Reference: nj.com (March 11, 2019) “I inherited my father’s home. Do I owe any kind of taxes?”