A concern for many individuals who inherit real property is whether they are inheriting an asset or a money pit. There are a number of factors that play into whether inheriting a home is going to be worth the hassle. One of the big questions that clients frequently raise is whether their tax bill is going to increase as a result of their inheritance.
Whether you inherit the property via will or otherwise, you become the new owner of the property. As such, you become liable for any state and local property taxes associated with the property. This is true even if the title to the property is still being passed through the probate estate.
In North Carolina, when a property owner dies, his or her property immediately vests in his or her heirs, regardless of whether they died with or without a will. If the property owner put the heirs name on the deed or put the home in trust, the property does not go through probate. As a result, the heir automatically gets the property and does not have to do anything further to receive title to it. However, if the decedent is passing the property through a will or he or she dies without a will, the property automatically vests in the heirs but the title to such property must pass through the probate estate.
If the property passes to you through deed or trust, you are the new owner and are liable for property taxes. The same is true if the property passes to you via will, even if the property is still in the probate process.
As the receiver of the gift/inheritance, you will not be liable for any taxes with respect to receiving the property. The estate may be liable for federal estate tax—North Carolina currently has no inheritance tax—if the amount of the inheritance is above the estate tax threshold. Currently, the estate tax threshold is $11.18 million for an individual and double that for a couple. Thus, while this is likely to change in the future, the federal estate tax currently applies to a very small percentage of the population.
Capital Gains Tax
Capital gains tax will only apply if you sell the home subsequent to inheriting it. The amount of money you will pay tax on is determined by the difference between your tax basis and what you sell it for. In equation form it looks like this: Selling price – Basis = taxable gain (x applicable tax rate) = amount owed. So, this begs the question; what is your basis?
Typically, when you buy property the basis is whatever you pay for the property (see IRC § 1012 “cost basis”). However, when you inherit property you get a “stepped-up basis” (see IRC §1015). Your basis in inherited property is the FMV at the decedent’s date of death—this is typically much higher than the decedent’s original basis; hence the term “stepped-up”. Since capital gains tax applies to the difference between basis and selling price, the higher the basis the better.
Let’s look at an example: A bought a property in the ‘50s for $50,000. A’s basis in the property is $50,000. A dies in 2019 when the property value is $100,000, and leaves the property in his will to B. B receives the home with a basis equal to its fair market value at the date of A’s death ($100,000). B already has a home, so she decides to sell it to an extremely motivate buyer who pays $50,000 over its fair market value, for a grand total of $150,000. B’s taxable amount is the difference between her $100k stepped-up basis and the $150k selling price; so, $50k. To figure the amount of tax owed, B applies the applicable capital gains rate to the $50k taxable amount.
If B were to have sold the home for a value less than or equal to her stepped-up basis, she would owe no tax. Furthermore, if B made the home her primary residence after she inherited it and then sold it thereafter, she may not owe any tax at all.
Per IRC § 121, an individual can exclude up to $250,000 of the sale of their primary residence. Thus, if the gain (the difference between the basis and the selling price) is less than or equal to the $250,000 exclusion rate, then no tax will be owed.
Lastly, if B held the inherited home as an investment (i.e. did not make it her primary residence) she could defer any capital gains tax by rolling the proceeds from the sale of the home into a “like-kind” asset within 180 day of receiving such proceeds (see §1031). A “like-kind” asset must be a sufficient similar investment (e.g. property) within the United States. Note, that the like-kind asset must be identified within 45 days of the sale.
You should stay informed to be sure that your inheritance is a benefit and not a detriment. If you have any questions regarding inheritance taxes or any other estate matters, call McIntyre Elder Law at (704) 998- 5800.
Brenton S. Begley
Elder Law Attorney
McIntyre Elder Law
“We help seniors maintain their lifestyle and preserve their legacies.”
PO Box 165
Shelby, NC 28151-0165