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Inheriting real estate and tax consequences

On Behalf of | Sep 19, 2022 | Estate Planning |

If you are fortunate enough to inherit property, you probably have some questions about the tax implications. On the other hand, if you are in the process of making an estate plan, you might also have questions.

Generally, real estate is an excellent asset to transfer to your inheritors. For the basics of capital gains on inherited real estate, see below.

Receive the full value of property

North Dakota does not have an inheritance or estate tax since 2005. However, federal tax rates apply, though only estates valued at $11.7 million pay it. For inheritors, this means that the IRS taxes the estate before you receive any of the inheritance. The main benefit of acquiring real estate is obtaining the total value without paying any taxes except for property taxes. You only pay taxes once you decide to sell the property, but there are still ways to avoid paying taxes.

Pay on a stepped-up rate

The IRS only taxes real estate inheritors on a stepped-up basis. This means you only pay taxes on the amount that real estate increases in value after you inherit it. If you inherit a property that your parents bought for $100,000 and sell it for $200,000 ten years later, you only pay taxes on the $100,000 it increased in value. If you sell the property right away for the same amount your benefactor paid, you do not pay any capital gains tax. However, this may go against the will of your benefactor.

Real estate allows several interesting options for estate planning. Giving your property to a beneficiary helps them avoid a tax burden until they decide to take profits.