As Benjamin Franklin famously wrote: “in this world nothing can be said to be certain, except death and taxes.” The case, of course, is no different when selling an inherited house.
The tax consequences when you are selling a house inherited in New Jersey can be very hard to understand and almost impossible to untangle much of the time.
The relevant laws may seem fairly simple at first glance, but they soon get complicated when you start to factor in all the legal conditions and nuances.
The short version is that if you made gains, then you will owe taxes, and if you had a loss, you may have a tax deduction.
But then it gets 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.
This article will explain all of the tax consequences you will face when selling a house inherited in New Jersey.
Win or lose
Will you be taxed for capital gains or losses?
The first consequence concerns capital gains or losses taxes. The tax consequences when selling a house inherited in New Jersey 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 New Jersey 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 already became personal property, and therefore you can’t deduct a loss if you go on to sell it in the future.
Has the inherited house been reported?
The second consequence pertains to the reporting of the house. In some cases, the executor has to file an estate tax return to report the inherited house. But this is only in cases when 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.
What exactly is “basis” determination?
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 and not what the decedent paid originally for the house back in the day.
If you have 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 will have a deductible loss. Just be sure to take into consideration the fact 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.
Did you know you have to report the sale of the inherited house?
It is essential that when you sell an inherited house you have to report the sale (along with the gains or losses) when you get around to filing 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. In addition to this, you also have to include the gain or loss on your personal Form 1040 tax return. Then you have to make sure that you use the Form 1040 (and not the Form 1040A or Form 1040EZ) for the year in which you actually sold the inherited house.
What should you do now?
As I warned at the very start of this article, the tax consequences when selling a house inherited in New Jersey can be extremely complex and terribly difficult to understand at best. Therefore, it is usually considered to be a good idea to find a professional in order to help you navigate the taxing and troubled tax waters.
So if you are looking to sell your house quickly then reach out to us and we will make you a Quick N Easy Offer.