Have you inherited a home in the recent past or in the process of getting one? Inheriting a house can be a bittersweet experience. Inheriting a house means acquiring a home without incurring any financial obligation. You can choose to sell the house and use the money to improve your life. Contrary inheriting a home implies that you have lost a loved one. Additionally, inheriting the property comes with legal obligations such as taxation. This article is tailored to guide you on the journey of inheriting a house and its tax obligations in California.
Determining the Basis of an Inherited House in California
One way to understand the taxation of inherited homes is to understand the computation of basis. Basis is defined as the cost of an asset to compute capital gains and other taxes as deemed by the Internal Revenue Service or IRS. When a homeowner passes on, IRS usually upscales the property’s basis to its fair market value at the time of the homeowner’s death. For example, if the initial owner of the house purchased it 25 years ago at $ 45,000 and its current worth at the time of their death is $ 150,000, IRS will value the property at $ 150,000 when charging for capital gains.
Know the Taxation and Financial Obligations for Inherited Houses in California
Luckily, people living in California do not incur the obligation of filing for state inheritance taxes. The State of California abolished State inheritance taxes at the beginning of the 1980s. Moreover, California laws prohibit charging its residents’ estate tax. However, with all these befitting tax exemptions in California, inheriting a home within the state is not tax-free.
Once you inherit an estate, you will be obliged to file their final state and federal taxes. Also, you will be obliged to file for federal estate tax returns, but this obligation is only applicable to estates worth more than a cap value; thus, ensure you are on the lookout for such tax laws. Lastly, you will be required to file an annual federal income tax return. Keep in mind that all these tax returns have various deadlines, and late filing attracts a fine. Ensure you are always at par with all the necessary tax obligations.
Furthermore, inheriting a home that is still under a mortgage will require you to offset all the outstanding balance to acquire the property fully. You will also be required to offset any outstanding bills accrued by the initial owner to secure full clearance to inherit the property. Clearing such bills and mortgage, in the long run, will have an impact on the resale value hence clear all of them.
How to Compute Capital Gain Tax when Selling an Inherited House in California
All Californian residents are eligible to pay capital gain tax upon inheriting a property. Nevertheless, if you want to sell an inherited property within California, you will have to charge sales tax. Moreover, the exception of sales tax is only applicable to single homeowners up to $ 250,000 and married couples with a valid marriage license up to $ 500,000 when declaring the proceeds from selling their home.
Heirs/heiress mostly do not qualify for sales tax exception since they have not lived in the property or have no intentions of living in it. However, you can still be eligible for a sales tax exception only if you prove to the authority you have lived in the house for more than three years before the actual sale date.
Capital gain tax is defined as the tax charged and remitted to the authorities from selling a property. Capital gain tax is generally computed within a “stepped up” tax basis. In California, capital gain tax for inherited is calculated in two ways.
* If you prove occupancy of the property for a year or less ( 365 days or less ) or less, the tax on the gain will be equal your ordinary income tax.
* If you prove occupancy of the house for more than year (366 days and above ), or more the tax on your gain will be in two levels.
* If your income categorization is in the last two brackets, the tax will be charged at 5%
* If your income categorization is on the higher tax brackets, tax will be charged at 15%.
Furthermore, in California, any appreciation of the house’ value attributed to the previous owner before their demise will not be taxed when computing capital gain tax. In other words, even if you sell the house at a price 15 times more than its initial owner’s buying price, you will not be entitled to pay any tax on the difference. You only be allowed to remit capital gain tax for two reasons; if you sell the property for an amount above the market value or prove occupancy in the property and within the period the property’s value appreciates.
Selling an Inherited Property in California
Now that you know your tax obligations, you can now start visualizing your financial obligations. This includes estimating how much income you expect from the sale and the procedures for getting the property ready for sale. Moreover, you will be entitled to cater for all the costs associated with the sale.
Clearing an inherited house while preparing it for sale can be a daunting task, especially with the emotions, household items or artefacts attached to the deceased. Hence you may choose to get support from a fellow family member or professional movers. You can choose to reserve the items with sentimental value and dispose of other unnecessary household items.
California laws also dictate that a house that is ready to be sold off should have completed probate or “the proving of the will” to sell. The law further says that a home with a sale value less than $ 150,000 has an easy probate procedure. Hence, you can comfortably sell an inherited house within the state of California upon completion of the probate process.
Inheriting a property may also come with the possibility of sharing the inheritance with a sibling or an appointed heir/heiress. In such a case, remember both of you will incur a fair share of financial obligations and taxation. Therefore, it is reasonable to arrive at a consensus on the sharing formula and abide by it during the entire selling process and declaration of proceeds for taxation.