Real Estate Tax Rundown

With tax time rolling around, one new problem that can come up for some people later in life is having to deal with the sale or inheritance of a property. It’s not something people deal with every year and every time it happens it tends to be ever so slightly different than the last.

We’ve been running into this often for some reason so here is some information about common scenarios we encounter when looking to offload some property and the associated taxes.

 

Scenario 1: I want to sell a property, but don’t want to pay taxes on it.

Ok, well if it’s your primary residence then you can reference our piece on Topic 701 which will allow you to exclude up to $250,000 of gains for a single person and $500,000 for a couple.

If the house it isn’t your primary residence you can look into a 1031 exchange. This can be used to defer capital gains on a rental property. The rule of thumb is that you should have rental income from the site on 2 tax returns, then, as long as you are buying another property with the proceeds from the sale, you can defer paying gains. Now eventually, when you get out of the game this merry-go-round will stop and you’ll have to pony up for the IRS, but using this strategy can allow a lot of maneuvering and help you break up paying gains on an expensive property.

Those are really the only two ways to get out of paying gains on a real estate sale. Lots of myths exist, but there are the two that are true.

 

Scenario 2: I’ve inherited a property, what do I do now.

Fair question. Generally, if you’re an heir then the property will get a stepped-up cost basis at the time of the owner’s death. This means that if you sell the property you’d only have to pay gains on appreciation in the price that took place after you inherited it.

If you’re a surviving spouse in PA, then in most cases you get a step up on half of the property value (attributed to the deceased spouse). So, if you sell the property later you still have all your cost basis to deal with for half, but the other half that your spouse owned will have been stepped up and should reduce capital gains.

Taxes on these items can be tricky and you should always consult a tax professional for guidance if something like this comes up. Hopefully these tips can at least let you know what to look for should you find yourself in one of these positions.