Real-estate is not just a common type of asset, it also passes from one generation to the next through inheritance. Whether you are inheriting property or trying to pass your property down to a chosen beneficiary, know that there are basic tax implications associated with the probate process.
Estate and inheritance taxes are notoriously complicated, but understanding them is crucial when it comes to the safety of your inherited or gifted property. The good news? In most cases, you won’t have to worry about estate tax penalties for real estate because the vast majority will never be assessed at all!
Here’s what you need to know if you are an heir to an estate that includes real estate property assets.
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Important Real Estate Tax Terms To Understand
It’s important to know the difference between estate tax and gift taxes. An inheritance is a property transfer at death, while an estate tax applies on this type of transaction as well. When you hear the terms “estate” or “gift”, they are referring to one unified system that includes both types of transactions; it’s just treated differently depending on when in time it takes place
Estate tax is a tax applied on property transfers when a decedent passes away. Gift tax on the other hand is a tax applied on property transfers while both parties are still alive and well. In the United States, the estate tax and gift tax are dealt with in a similar fashion. When you hear the terms “estate tax” and “gift tax,” they are actually referring to the same tax system although sometimes they can be treated differently and you can also do different things to prepare for them.
Inheritance tax is a different system from estate tax and gift tax. The most important differentiating concept between inheritance tax and estate or gift taxes is that an inheritance tax is assessed to the person who inherits the assets instead of to the estate. Estate taxes do not exist on the federal level but certain states do have inheritance taxes which are important to understand.
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Do You Qualify For An Exlusion on an Inherited property?
The answer is usually no. However, there are stepped-up basis rules for inheriting real estate which you may benefit from. You may not need an exclusion at all when you sell an inherited home or property.
What Heirs Benefit From The Home Sale Tax Exclusion?
The home sale tax exclusion law is meant to provide homeowners with a generous tax exclusion when property is sold. The tax law provides homeowners for up to $250,000 in profit exclusion from a home and up to $500,000 tax exclusion for married couples.
How Do I Make Sure I Qualify For A Home Tax Exclusion?
In order to qualify for the tax exclusion, the home must have been used as the main home for two years out of the prior five years before the sale.
Essentially, if you are looking to sell the home as soon as you inherit the property, you will not qualify for this exclusion. You would have to live in the home for at least two years to qualify.
Again though, you might not actually need the exclusion because of the stepped-up basis rules. If you have specific questions about these laws, you should consult an attorney in your state or a probate tax attorney.
How does the U.S. estate tax work for real estate?
The U.S. estate tax system is a complicated one, but it’s worth understanding because of how much money can be at stake for your family and loved ones after you pass away. There are 12 different brackets with rates ranging from 18% to 40%. Taxable estates ranging from $0 to $10,000 are taxed at an 18% rate, and on the higher end, the amount of taxable assets that exceed $1 million is taxed at a 40% rate. For real estate purposes, it’s also important to note that this tax law includes both money and property – so if someone leaves $20 million in cash and $10 million worth of real estate to heirs, it would be considered a $30 million estate (and therefore subject to taxes).
If you want peace of mind knowing your family will be taken care of financially after you pass or you want to know the implications of the money you will be receiving as an heir, it’s important to understand how the U.S. Estate Tax Laws work. If you have real estate that is currently being probated, we can help take care of the wait by issuing a probate advance to get you cash within 24 hours.
Estate taxes are paid directly by the decedent’s estate while inheritance taxes are paid by the heir or beneficiary inheriting the property. Here is a breakdown of states and their associated tax laws. States that have an estate tax different states have different thresholds for activating the tax:
States with an estate tax:
- New York
- Rhode Island
- Washington (state)
States with an inheritance tax:
- New Jersey
State that has both estate and inheritance tax