Taxes and Inheritance

Our clients often ask us if they will have to pay taxes on inherited property. It is important to understand that all taxes on inheritance is the obligation of the estate –therefore, the estate will pay any taxes (along with any other debts) due and owing before being distributed to the beneficiary. The amount of the estate tax depends on the value of the estate as well as the estate tax law in effect at the time.

Currently in 2018, (and supposedly passed as a permanent law by Congress in 2012) there are no federal or New York estate taxes on estate property valued at under $5.4 million per person (double for a married couple) and adjusted annually for inflation. An estate exceeding that threshold value will owe a very high estate tax (in 2018 it ranges from 18% to 40%).

However, we must differentiate and understand capital gains taxes as well. Capital gains taxes are due upon the sale of appreciated property. For example, if I purchase stocks for $250,000 and sell them for $300,000, I have to pay a capital gains tax on the $50,000 worth of appreciated gain. The amount of the capital gains tax would be calculated based on my income and can range anywhere from 10% to close to 40% (of the value of the gain). For real property that is my primary personal residence, I have a capital gain exemption of $250,000 or $500,000 if I am married (and this is my spouse’s primary personal residence as well). When it comes to inheriting appreciated property however (whether real property or personal property), there is a capital gains exemption known as a “step up in basis”—this means that the purchase price is not used to calculate capital gains taxes but rather the fair market value at the time of death. Therefore, and by way of example, if you are inheriting stocks or a house that were purchased at $300,000 and are worth $600,000 at the time of death, if they are sold for the fair market value of $600,000 you (as the beneficiary) would not owe any capital gains taxes upon the sale. If the same property is sold for $650,000, the capital gains tax would be on only the $50,000 gain—the gain from the fair market value at the time of death to the time of sale (not the entire appreciation of $350,000).

These tax laws are very important to keep in mind and will either save or cost you a lot of money depending on the estate planning you are engaging in. For example, we see that if your estate is under $5.4 million, to re-title the deed to your home outright to your child that appreciated in value since you purchased it and one that you are planning on living in for your entire lifetime would be a very costly mistake.