If You Sell Inherited Land Is It Taxable?

If you sell inherited land, is it taxable? Well, the short answer to your question is “Yes, but your tax bill may amount to zero dollars…”. Before I confuse you any further it should first be made clear that anytime money changes hands from one party to another in a transaction it is subject to taxation. So the first part of the answer to the “If You Sell Inherited Land Is It Taxable?” question is undoubtedly “YES”. This applies to bare land, single-family and multi-family. They are all one and the same in this scenario. The real question you should be asking is “Will my capital gains tax bill amount to zero dollars once I apply the IRS rules for those who have inherited property?”

Stepped-Up Basis

If you haven’t heard, there is a rule called the “stepped-up” basis which basically states that whenever people, or a person inherits property, they will be taxed on the value of the asset at the time of the decedent’s death. 

For instance, if you have a family member who paid $25,000 for 40 acres of farmland back in 1975 and it was valued at around $1 million dollars at the time of their death in 2010, your new cost basis would be set to the value at the time of their death (i.e. $1 million) and not the original value of the property which was $25,000. This is a humongous tax savings that you get as a result of the stepped-up basis rule. If you think about it, the stepped-up basis makes sense because you shouldn’t be taxed for the original purchase price since you were never a party to the original transaction. As a result, the value of the asset at the time the person passed away is what is attached to your new cost basis.

As you can probably assume, if you decide to sell the property immediately upon your relatives passing, then you will probably have very minimal taxes to pay (if any). Since real estate tends to increase over time, it’s pretty safe to assume that whenever you decide to hold onto the property for an extended period of time (i.e. at least 3-5 years) then you can expect to pay more in taxes since the inherited property will most likely go up in value. If for some reason the property sells for less than what it appraised for at the time of the decedent’s death, then you wouldn’t have to pay any taxes. So again, the short answer for the “If you sell inherited land is it taxable?” question comes down to WHEN the property is sold and for HOW MUCH.

Don’t Get It Confused With Estate Taxes

People who inherit property tend to get the previous stepped-up basis rule confused with the estate tax. The estate tax is a federal tax which must be paid by the “estate” if the total dollar value of the assets exceeds a certain amount. This dollar amount changes by the year and if the total estate’s value EXCEEDS this dollar amount then taxes will need to be paid. If the total estate value is LESS THAN the dollar amount for the tax year then the estate is EXEMPT from having to pay the estate tax. 

For example, if the total amount of the decedent’s entire estate (i.e. 401k, real estate, bank accounts, stocks, etc.) is anywhere near $10 million, then you should seek the professional services of an estate tax attorney since you may have to pay taxes. Otherwise, at the time of this writing, you shouldn’t have any estate taxes to pay. 

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