Inheriting an asset, whether it is property, money, or anything valuable, can bring up conflicting feelings. If you are mourning a loss, you are going through a tough time. At the same time, life goes on, and there are important matters you will need to tend to.
If you are inheriting a house from a family member’s estate in California, one question you will want to know is if you have to pay taxes on the value of the house they left for you. There could also be other tax implications, which is why it is critical to understand how this works.
The good news
First, let’s go with the good news. You will not have to pay federal inheritance tax, which is a tax paid for the purpose of inheriting property. This is good news for you! You can inherit the property without being taxed for it.
Now, let’s look at other tax implications that may come into play. For example:
This type of tax is taken from the estate of the person who passed away before the assets are distributed to the people who are inheriting.
In the case of federal taxes, only estates worth more than $12.06 million (this number is accurate as of 2022) are subject to estate taxes. This amount can change.
In California, when you inherit a house, it must be appraised, and the appraiser determines how much it is currently worth. You will have to pay property taxes based on this amount unless you are the spouse or child of the person who passed away.
If you are the spouse or child, you may qualify for an exclusion, so the property will not need to be appraised again, and you can continue to pay the same amount of taxes that your loved one paid.
Capital gains taxes
This is not an immediate concern, but you may have to pay a tax if you sell the house later. The good news if that because the house was given to you as part of an inheritance, the property tax basis is updated to the market value at the time your loved one passed away.
For example, if your uncle bought the house for $100,000 and it was worth $500,000, your “basis” for paying taxes is $500,000. If you sell the house for $550,000, you only pay capital gains tax on the $50,000 gain, not the entire value, because your relative bought it and you inherited it.
You do not have to worry about income taxes unless you rent the house. If you rent the house, you have to report that rental income on your tax return.
If you sell the house and profit, like explained above, you will also have to pay income tax on the profit.
Inheriting a house can sound really complicated, but with proper counsel, you should be able to navigate the process with no concerns. Overall, the tax implications are minimal in this situation. Understanding how this works is important, though, because it will allow you to make better decisions and informed choices after you receive the property.