Receiving an inheritance is surprisingly common in the US. From 1989 to 2007, nearly 21% of Americans received an inheritance.
Yet, there's no handbook telling you what to do if you've inherited a house. And when it comes to legal issues like taxes, you can't afford not to be in the know. That's why we're bringing you this guide.
Wondering about the inheritance tax on a house or what happens if you decide to sell an inherited home? We're answering these questions and more today, so keep reading.
What to Consider After Inheriting a House
After your relative passes away, estate law requires an appraisal to determine the fair market of their real estate. Fair market value is the value of the home at the time of your relative's death.
Why does fair market value matter? Because this amount will help determine the capital gains tax and the inheritance tax on a house.
The Estate Tax
If you've inherited a house, you may be subject to state and/or federal estate taxes.
In Pennsylvania, there are only two cases where an inherited property is exempt from the estate tax. The first is if a couple owns the home jointly. The second is if the heir is a child aged 21 or younger.
Otherwise, here are the tax rates for inheriting a home in Pennsylvania:
- 4.5% on the fair market value of estates passed to direct descendants
- 12% on the fair market value of estates passed to siblings
- 15% on the fair market value of estates passed to other heirs
The Federal estate tax offers exceptions to all inheritances valued below $5,450,000. So, say you inherited a home that, along with all other portions of the estate, is worth $5,449,000. You would not have to pay federal estate taxes in this case.
The Capital Gains Tax
If, after inheriting a house, you decide to sell that house after one or more years, you will be subject to capital gains taxes.
How much in capital gains you pay depends on whether you sell the home for fair market value. Selling the home for fair market value may mean you're exempt from capital gains taxes.
However, you will be subject to these taxes for each dollar you gain for the home that's above fair market value.
For example, the fair market value of your home is $500,000 but you sell the home for $501,000. Because you gained $1000 over fair market value, you'll have to pay up to 15% on that profit.
Inherited a House? Call MG Law
If you have or are in the process of inheriting a house, you need to consider estate and capital gains taxes. You may be exempt from the former if the estate is worth less than $5.45 million. You may be exempt from the latter if you choose not to sell the home or sell the home at fair market value.
Keep in mind that these aren't the only legal issues you'll have to worry about if you've inherited a house. That's why you need the estate planning experts at Monastra & Grater. Contact us today to schedule a consultation!