How Do I Calculate the Capital Gain on Sale of Inherited Property?
I inherited lake shore property (vacant land–no house) that I am now selling. How do I figure the capital gains on the sale?
The capital gain will be the difference between the value on the date of death of the person from whom you inherited the property and the proceeds you receive after an realtor’s fee. Capital gain is the difference between the net proceeds of the sale and the property’s basis. The basis of inherited property is the value on the date of death of the person from whom the property was inherited. This is often referred to as a “step up” in basis or “stepped-up” basis, because this almost means an increase in the basis from what it was before the prior owner died. For them, the basis was what they paid for the property plus the value of any improvements.
For instance, if the decedent in your case bought the property for $50,000, then that was their basis. However, if property was worth $100,000 when you inherited it, that’s your basis. If you sell it for $200,000 and pay a realtor $10,000, your gain will be $90,000 ($200,000 – $100,000 – $10,000 = $90,000).
If an estate tax return was filed for the person’s estate, you must use that value for determining the capital gains. However, except in a few states with relatively low estate tax thresholds, very few estates have to file estate tax returns these days. In the absence of such a return, the best way to determine the date-of-death value is to obtain a formal appraisal. However, you can use the tax assessment for the property during the year the person died or ask a realtor for a statement of value as of the date of death, being aware that if you are audited by the IRS, you will have to obtain a formal appraisal at that time.