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A brief look at capital gains tax and inherited property

On Behalf of | Oct 7, 2023 | Estate Planning

If you’ve owned your Florida home for many years, you’ve likely seen it increase in value considerably. If you paid off your mortgage, it’s likely your most valuable asset. 

As you develop your estate plan, you may be considering leaving your home to your adult child – either to use as a primary residence, vacation home or rental property or to sell and keep the proceeds. You may be concerned about what kind of capital gains tax they’d have to pay if they sell the house for considerably more than its initial value when you purchased it. That could easily be in the six figures, if not higher.

The “stepped-up basis” rule

The good news is that the IRS protects those who inherit property from capital gains tax through what’s called a “stepped-up basis” rule. Let’s say you paid $50,000 for your home decades ago. When your child inherits it, say it’s worth $400,000. They keep it for a few years and then sell it for $500,000.

They won’t have to pay capital gains tax on the difference between that original purchase price and the sale price, but only on the “stepped-up” amount of $100,000 (the difference between its value when they assumed ownership and when they sold it). If they use the home as their primary residence for two years or more, it most likely will be exempt from far more than that in capital gains tax.

If you’re considering leaving any specific asset with considerable value, like a home, boat or car, to a child or other beneficiary, it’s wise to understand the potential tax, financial and legal implications it could have for them. It’s also wise to make sure that they even want it. Communication with your loved ones as you develop your estate plan can help prevent unwanted surprises after you’re gone.