The tax consequences of selling an inherited house in Baltimore, Maryland can be hard to understand and untangle much of the time.
The Tax laws are written in plain language but it often gets complicated when it comes to interpreting them and applying them to your personal situation. The most important factor in determining tax consequences of selling an inherited house in Baltimore is whether you have inherited a gain or a loss on the house.
The grounds of determining a gain or loss depends on a few factors such as the primary use of the house and which tax year the decedent transitioned.
What Are the Tax Consequences of Selling an Inherited House in Baltimore, Maryland?
Capital Gains or Losses Taxes
The tax consequences when selling a house inherited in Baltimore include being subject to capital gains taxes. Capital gains or losses are those that stem from the sale of items you use for personal or investment purposes, such as stocks or a house. So for income tax purposes, the sale of an inherited house in Baltimore is treated as a capital gain or loss.
The catch with selling an inherited house is that a gain or loss is considered a long-term gain or loss. Further, losses on personal property cannot be claimed as a tax deduction. So if you ever used the inherited house as your personal home, it became personal property, and you can’t deduct a loss if you sell it.
Reporting the Inherited House
In some cases, the executor has to file an estate tax return to report the inherited house. But this is only if the estate exceeds the inflation-adjusted exemption amount.
The determination of the gain or loss on a house sale depends on the “basis” of the house. As the basis goes higher, the taxable gain from a sale decreases. There are, however, different rules for the sale of an inherited house that allow for a special stepped-up basis.
The basis of the house depends largely on when it was inherited. In general, the basis is the fair market value on the date of the decedent’s death. What this means is that the capital gains taxes you owe are based on gains above the property value at the time of the decedent’s death – not what the decedent paid for the house.
If you never lived in the house and if it sells for less than what the fair market value was at the time of death, then you have a deductible loss. Just be aware that only $3,000 of such losses can be deducted each year against your ordinary income. Anything above that $3,000 will have to be carried over as deductions in future years.
Reporting Sale of the Inherited House
Obviously, when you sell an inherited house, you have to report the sale (and gains or losses) on your respective tax return the year the transaction occurred. The basis will be used to determine the overall gain or loss of the sale. In order to determine the cost basis, you will have to use the fair market value of the property at the time of the decedent’s death.
To report the gain or loss, you need to use the standard document for this purpose, the IRS Schedule D. You also have to include the gain or loss on your personal Form 1040 tax return. And make sure you use the Form 1040 (and not the Form 1040A or Form 1040EZ) for the year in which you sold the inherited house.
The tax implications can be complex and difficult to implement. The best thing to do is find a competent professional such as a CPA or a tax attorney to plan ahead.