How To Avoid Capital Gains Tax When Inheriting Property
Inheritances are meant to provide family members with a bit of financial security after a loved one passes away. Although people usually benefit from the inheritances that are left to them, there are times when inheriting property can be more stressful than a person thought. For example, even the most well-intentioned inheritances can result in capital gains taxes. Capital gains taxes are often significant, but there are ways you can avoid or reduce them.
The Step-Up in Basis Rule
When you inherit property, you may be able to take advantage of the step-up in basis rule. Under this rule, the cost basis of the property can be adjusted to the fair market value of it at the time the original owner passed away. For example, if your loved one purchased the property for $100,000 and it is now worth $300,000, the cost basis is increased to $300,000. If you decide to sell the property for $300,000, you are not taxed on the capital gain accrued during the original owner’s lifetime. The adjustment provided by the step-up in basis rule can greatly reduce the capital gains tax if the value of the property has appreciated over time.
Use the Property as a Residence
If you live in the property for at least two years before selling it, you can benefit from the IRS Section 121 exclusion. This provision allows you to exclude up to $250,000 of capital gains from your income, or $500,000 if you are married and file taxes jointly when you sell the primary residence, or the inherited property you received. This can significantly eliminate or reduce a large portion of your capital gains tax liability.
1031 Exchanges for Investment Properties
If the property you inherited was investment property, you may be able to consider a 1031 exchange. Using this strategy, you can sell the property and reinvest the proceeds of the sale into a new property. This allows you to defer all capital gains taxes. In order for a 1031 exchange to be valid, you must follow specific timelines and rules. You must identify a replacement property within 45 days, and the exchange must be completed within 180 days of selling the original investment property.
It is important to speak to an attorney when using this strategy. If any of the rules are not followed, or you do not comply with timelines, this may no longer be an option for you. A lawyer can ensure compliance with the rules so you can take advantage of this strategy.
Our Estate Planning Lawyer in St. Petersburg Can Explain Your Options
Receiving property as part of your inheritance has many benefits, but there are also some disadvantages involved. At Legacy Protection Lawyers, LLP, our St. Petersburg estate planning lawyer can explain your legal options and how they will impact you so you can make informed decisions suited to your needs. Call us today at 727-471-5868 or contact us online to request a consultation with one of our experienced attorneys and to learn more about how we can help with your case.
Source:
irs.gov/pub/irs-drop/rr-14-02.pdf
