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Inheriting a Parent’s Real Estate: Tax Issues

front view of modern residential home during early autumn season in northwest of united states. maple trees beginning to change leaf colors.

Inheriting a parent’s real estate can certainly be a good thing.  But, it can be complicated with regard to various tax issues.

Below is a simple example to help you understand the basics.

A. Estate Taxes

  1. Suzanne’s mother passed away many years ago.  Her father, Ed, remained in the house he had shared with his wife until his death.  Upon his death, Suzanne inherited the house.
  2. As legally required, the fair market value of the house at the time of Ed’s death was determined. This is called the stepped-up basis.  
  3. The stepped up basis was included with all of Ed’s other assets when determining the total value of Ed’s estate, which came in at $2,675,000.
  4. As of 2016, estates totaling $5,450,000 or less are not subject to Federal estate taxes.  Estates totaling $675,000 or less are also not subject to New Jersey estate taxes.
  5. Because Ed’s estate was valued at $2,675,000, the estate was not required to pay any Federal estate taxes.  However, the estate was required to pay NJ taxes on the $2,000,000 over the NJ limit of $675,000.

B.  Capital-Gains Tax

  1. After the estate was settled (i.e., all taxes,  debts, and any other outstanding issues were resolved), Suzanne officially assumed ownership of her father’s house.  Suzanne decided that she preferred to have the cash, and put the house up for sale.  She knew that the fair market value was $400,000.  However, few houses were on the market, and people were anxious to move into her neighborhood.
  2. Suzanne put her house up for sale at $450,000.  The good news was that she had three offers. The house sold for $455,000.
  3. Suzanne had to pay capital-gains tax on the $55,000 (i.e., the amount she “gained” above the fair market value of $400,000).
  4. Note: If Suzanne had only been able to sell her house for $400,000, then she would not have paid any capital-gains tax.

The above example seems fairly straightforward.  However, as the beneficiary, there are many other issues that may impact your tax situation.  Capital-gains tax rates may differ depending on whether you sell a property in the year the person died vs. in later years.  How you handle inherited rental properties may also have tax implications.  The list goes on.  It is highly recommended that you consult with a tax attorney for assistance in navigating through the various tax issues.

Getting Legal Help:

Experienced Estate Planning Attorney, Elga A. Goodman, has extensive experience dealing with real estate tax matters.  She can work with you to help insure that you get it right for your situation. Contact us today at 973-841-5111.


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