“Hi Gary. I inherited a house 4 years ago and haven’t lived in it for awhile. I want to sell it but am concerned about paying taxes. I’m not sure if it’s still my principal residence for tax reasons. I’m not sure how to proceed…”
Answer:
I’ll share my thoughts, but you should talk to your tax advisor.
We’re obviously hoping you can pay zero or minimal taxes when you sell. The two scenarios that may apply for you are:
1. Your “basis” is high enough to avoid taxes
When people inherit a home, usually they get “stepped up basis.” This means the IRS treats it as though you bought the home for market value at the time. So if that was, say, $500,000 and you sell for $400,000, there would be not taxable gain.
…ASK YOUR TAX ADVISOR: “Did I receive the home with stepped up basis? What was the basis?”
2. Sell house as your “principal residence”
Under IRS code 121, if you’ve owned and lived in your home for at last 2 of the past 5 years, you can exclude $250,000 of gain ($500,000 for couples). Depending on your basis, this could mean zero or minimal taxes due.
…ASK YOUR TAX ADVISOR: “Can I treat this as my principal residence and sell it and exclude $250,000 (or $500,000) of gain under IRS code 121?”
Of course, the ultimate question you should ask is, “How much tax will I owe if I sell for $XXX?” Let me know what your tax person says.
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