Taxes are often a very complicated, but when it comes to taxes for inherited property it’s pretty simple. The key is understanding the concept of “tax basis.” “Tax basis” is the value that is used to calculate the taxable gain or loss when an asset is sold.
For example, if I buy a house for $75,000.00 my tax basis is $75,000.00. And if I sell the house a few years later for $125,000.00, then my taxable gain (or capital gains tax) is $50,000.00 ($125k - $75k)
So, what is a capital gains tax?
It’s a type of tax on the growth of investments incurred when people sell the investment. In other words, it’s a tax on the profit that you receive from “buying low and selling high.”
How does it work for inherited property?
Generally, for inherited property the beneficiaries don’t have to pay income tax on the property they inherit. But if an asset is inherited and then sold, then the beneficiaries may owe capital gains tax.
Using the example above, if I had inherited the same property my tax basis would be the value of the property as of the date of death. So, let’s say as of the death date the property was valued at $115,000.00 and then I sell it for $125,000.00, then my capital gains tax is only $10,000.00 even though it’s increased $50,000.00 in value.
So, what does this mean for someone who inherits under the will?
If you inherit property under a Will, and then the asset is sold so that you receive the monetary value, then you won’t have to pay any capital gains tax AND you won’t have to pay an Ohio inheritance tax. You will owe a federal tax if the estate is worth over $11 million dollars.
If the real estate is sold by the estate at a profit and then you receive the proceeds, you won’t be taxed on the profits. The primary way for you to get taxed for real estate is if you inherit the real estate, it gets transferred into your name, and then you sell it at a profit. That’s how you’ll trigger the capital gains tax.
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