Is money received from the sale of inherited property considered taxable income? (2024)

FAQs

Is money received from the sale of inherited property considered taxable income? ›

We used Ask Blue J to write a response: Money received from the sale of inherited property is generally not considered taxable income in the traditional sense. However, the sale of such property is usually treated as the sale of a capital asset, which means it may be subject to capital gains (or loss) treatment.

Inheritances aren't considered income for federal tax purposes, but subsequent earnings on the inherited assets, including interest income and dividends, are taxable (unless it comes from a tax-free source).

Report the sale on Schedule D (Form 1040), Capital Gains and Losses and on Form 8949, Sales and Other Dispositions of Capital Assets: If you sell the property for more than your basis, you have a taxable gain. For information on how to report the sale on Schedule D, see Publication 550, Investment Income and Expenses.

Income Tax

Federal tax laws do not consider most inherited assets to be taxable income. This means that when an individual inherits assets, whether in the form of cash, stocks, real estate, or other valuable properties, the assets are not subject to federal income taxes at the time of transfer.

Taxpayers who don't qualify to exclude all of the taxable gain from their income must report the gain from the sale of their home when they file their tax return. Anyone who chooses not to claim the exclusion must report the taxable gain on their tax return.

The trust fund loophole refers to the “stepped-up basis rule” in U.S. tax law. The rule is a tax exemption that lets you use a trust to transfer appreciated assets to the trust's beneficiaries without paying the capital gains tax. Your “basis” in an asset is the price you paid for the asset.

Your share of sales proceeds (generally reported on Form 1099-S Proceeds From Real Estate Transactions) from the sale of an inherited home should be reported on Schedule D (Form 1040) Capital Gains and Losses in the Investment Income section of TaxAct.

Enter the sale in TurboTax as an investment sale, the same as a sale of stock, but for which you did not get a 1099-B. For the date acquired enter the word "Inherited" instead of a date. TurboTax will make the necessary entries on Form 8949 and Schedule D.

In 2024, the first $13,610,000 of an estate is exempt from taxes, up from $12,920,000 in 2023. Estate taxes are based on the size of the estate. It's a progressive tax, just like our federal income tax. That means that the larger the estate, the higher the tax rate it is subject to.

What happens when you inherit a house from your parents? ›

Basically, the heir or heirs can choose to occupy it, sell it or rent it out. Here's a general breakdown of what each choice means: Occupying the home means it will stay in the family, which can be appealing if there are memories connected with the property.

The basis of property inherited from a decedent is generally one of the following: The fair market value (FMV) of the property on the date of the decedent's death (whether or not the executor of the estate files an estate tax return (Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return)).

If you inherit a paid-off house without worrying about the mortgage, several options are available. After the Probate, you can decide what to do with the home, whether you want to occupy it, sell it, or rent it out. Keep up with the value, costs, laws, and taxes involved in this process so you get everything.

Strategies to transfer wealth without a heavy tax burden include creating an irrevocable trust, engaging in annual gifting, forming a family limited partnership, or forming a generation-skipping transfer trust.