Tax Consequences when Selling an Inherited House in Baltimore

The relevant laws may seem fairly simple at first glance, but they get rather complicated when you factor in all the legal conditions and nuances. The bottom line is this: if you made gains than you’ll owe taxes, and if you experienced a loss than you may be entitled to a tax deduction.

But then it gets even more complicated because whether you made a profit or had a loss also depends on when the decedent died and the use you made of the house.

What Are the Tax Consequences When Selling a House Inherited in Baltimore?

1. Capital Gains or Losses

The tax consequences of selling an inherited house in Baltimore include being subject to capital gains taxes. Capital gains or losses are those that stem from the sale of items that 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.

2. Reporting of the Inherited House

In some cases, the executor or personal representative 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. If 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.

3. Determine the “Basis” of the House

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 over and above that $3,000 will need to be carried over as deductions in future tax years.

4. Reporting the Sale of an Inherited House

Obviously, when you sell an inherited house, you have to report the sale (as well as the gains or losses) when you file your income tax return. To calculate the gain or loss, you have to subtract the basis from what you received for the sale.

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 that 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 consequences when selling a house inherited in Baltimore can be complex and difficult to understand at best. It is usually a good idea to find a local professional in order to help you navigate the tax waters before and after the sale.

At Maryland Home Buyers we are ready to help you reach your real estate goals and will be glad to answer any & all questions that you may have. Contact us by phone at (410) 657-2523 or fill out the online form at https://www.homebuyersmd.com.