It can be life-changing inheriting a home in Massachusetts, even when you are still grieving over the loss of your loved one. But you could also be inheriting existing debts on the house. You also need to be aware of the tax consequences when selling the inherited home.
When selling a house you inherited in Massachusetts, the tax consequences can be challenging and could cost you thousands of dollars. You may be required to get someone professional who understands these complexities to assist you in the sales process.
What are the Tax Consequences?
No matter what, taxes will have to get paid on the inherited home in Massachusetts.
Let’s take a look at the potential legal and tax consequences you could come across when selling an inherited house in Massachusetts:
The basis of the house is the market value of the property at the time of the deceased’s death and not what he paid when he initially purchased the home. The capital gains and other taxes owed are calculated based on the gains above the property value at the time of death.
You’ll have a deductible loss if it sells for less than what the fair market value was at the point in time of the deceased’s death and if you never lived in the house. Only $3,000 of these losses can be deducted annually against your ordinary income. Deductions in later years will occur if there are losses above the $3,000.
Reporting the Inherited House
Sometimes the executor has to report the inherited house and file an estate tax return. This only occurs if the estate is more than the inflation-adjusted exemption amount. As the basis increases, the taxable gain decreases from the sale.
Reporting the Sale
You have to report the sale of an inherited house when you file your income tax return. First, you’ll need to calculate the capital gains or loss by subtracting the basis from what you earned from the sale.
The amount then gets reported and is done by using the IRS Schedule D form. The gain or loss also needs to get included on your personal Form 1040 tax return for the year you sold the inherited house.
Before selling the inherited house, you need to discuss the taxes that will need to get paid with the other beneficiaries in the inheritance. The amount resulting from the capital losses or gains will get paid against the sale of the home.
Taxation of Gains or Losses
If you opt to sell the inherited home in Massachusetts, the sale will get regarded as a capital loss or gain for income tax purposes. You will need to keep the property for at least a year to qualify for lower long-term capital gain rates. No matter how long you own the inherited home, any loss or gain will get treated as long-term.
In short, if you made gains, you will owe taxes, and if you made a loss, you would have a tax deduction. The complications arise when you factor in when the deceased died and whether you made a profit or loss.
Capital Gains Taxes
You have capital gains tax to pay for income tax purposes when selling an inherited house in Massachusetts. The gain or loss gets deemed a long-term gain or loss when selling the home.
You can’t claim losses on personal property as a tax deduction. Therefore, if you used the inherited house as a personal home, it becomes personal property, and a loss can’t get deducted when you decide to sell it.
The step-up tax basis often protects the capital gains tax on inherited property. The stepped-up basis is the current appraised value of the property.
If you inherit a house initially bought by the deceased for $100,000, but it’s worth $300,000 when you inherit it, then the basis is the higher amount. If you sell the house for $320,000, you’ll pay capital gains on the difference ($20,000) instead of the full value.
If the house sells for a loss at a lower amount than the appraised value, then you can deduct the loss up to $3,000 per year and will prevent you from paying any capital gains tax.
The state of Massachusetts has no inheritance tax, but there is a Massachusetts state estate tax. This is only applicable if the estate is worth more than $1 million and gets paid from the estate. The remaining amount will get distributed between the beneficiaries and heirs.
If the estate is more extensive than $11.7 million, a federal estate tax is applicable.
Seek Legal Advice
Before selling the inherited home, understand that the house must get sold by the estate according to the deceased’s will. If there’s no will available, you can ask the probate court to give you permission to sell the house and distribute the profits. By seeking an estate attorney, you will get the best advice according to your situation.
The attorney will have your best interest at heart and will guide you through the whole process of selling the inherited house. They will also make sure that all documents are filed on time to avoid any delays.
Selling an Inherited Property
We can sell your house for top dollar or buy your home for cash through our “Fast Cash Offer” option. Our real estate agents are licensed and can help you with your house’s sale if you prefer to go the traditional route.
To get a free, no-obligation cash offer, or you want to discuss your situation further, then call us at 781-309-7085 today!