Q&A: Tax Exclusion on an Inherited Home?Here's a question you might hear more of in the years ahead. As many Baby Boomers age and pass on, their children will inherit their homes.
Q: My father died recently and I inherited his house. If I sell it, do I receive the same tax exemption on gains as I would with my own home?
A: No, but it might not matter much. If you did want to qualify for the $250,000/$500,000 exclusion, you'd have to live in the house and use it as your primary residence for a minimum of two years. However, special "stepped-up basis" rules apply for inherited homes.
A "basis" is the home's original cost for determining tax purposes. To determine gains, subtract the basis from the sales price. The basis is the cost of the home, plus any improvements. When you inherit your father's home, the basis is not the cost of the home when your father paid for it. Instead, the basis is stepped up to fair market value at the date of your father's death. This usually drastically reduces the gain.
In cases where you are forced to sell the home for less than the stepped-up basis, you may be eligible to take a capital loss on your taxes, though this maxes out at $3,000/year. The loss can be carried year-over-year, though. (For example: A loss of $27,000 would be carried for nine years.)
*Consult your Tax Advisor for more details.