What taxes are due on an inherited home?

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Q. The home of my father was sold after he died. The proceeds were split between me and my siblings per the will. Are the proceeds subject to tax?
— Beneficiary

A. We’re sorry to hear about your dad.

There are many types of taxes to consider in connection with an estate: estate tax, inheritance tax, income tax.

“The federal estate and gift tax exemption amount is now $11.4 million,” said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park. “New Jersey residents passing on or after Jan. 1, 2018 are no longer subject to a New Jersey estate tax, and children are exempt from the inheritance tax, so presumably you are asking about income tax.”

Romania said the proceeds of the house sale are subject to income tax but you will likely not incur the tax.

She said income tax is paid on the difference between the sales price and the basis of the asset less costs of the sale.

Basis is generally the purchase price plus the cost of improvements.

However, assets owned by a decedent get a step-up – or step-down – in basis to the value as of the date of death.

“Thus you would only be taxed on the difference between the sales price and the value at the date of death less selling costs – assuming your father owned 100 percent of the home at the time of his passing,” she said.

If this difference between date of death and sale values is significant, you will incur a tax, typically at capital gains rates, but generally there is little or no gain to tax, Romania said.

You should be sure to retain proof of the date of death value of your father’s home in case a future income tax audit comes your way.

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