28 Jul I’m selling an inherited home. What taxes will be due?

Q. I inherited a modest New Jersey home in 2013, which we turned into an LLC and rented out. I own it with my cousin and we are thinking of selling it in January 2022. What should we expect for capital gains? The home is only worth about $375,000.
— Beneficiary

A. It’s good to know what you’re getting into before you sell the home.

When you acquire inherited property, your tax basis is generally the fair market value on the decedent’s date of death.

For example, if the value of the property in 2013 on the date you inherited it was $200,000, that would have been the cost basis you used for the rental property, said Gail Rosen, a Martinsville-based certified public accountant.

Continuing with this example, the $200,000 value would have been used to determine the cost basis and calculate the depreciation expense amount deducted every year that you rented out the property, from 2013 to date, she said.

Again, using this example, when you sell the property, your gain would equal the sales price of $375,000 less the $200,000 cost basis less depreciation to date plus you made to the property going forward,” Rosen said.

To calculate the federal tax on this transaction, the gain would be taxed at ordinary income tax rates up to the amount of depreciation recapture, she said.

“Any portion of the gain remaining after depreciation recapture would be taxed using the capital gains tax rates.  In addition, New Jersey would also tax the net gain from this computation,” she said.

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This story was originally published on July 28, 2021.

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