Legal Question in Wills and Trusts in California

Re: taxes on inherited property

There are no taxes for the inheritance to the person who received the inheritance. Furthermore, the basis to the property (the starting point for capital gains tax) is "stepped-up" to the value of the property on the date of death. In otherwords, if on the date the decedent died the value of the property was $950K, and now it is $1 million, the capital gain would be $50K and you would be taxed at about 25% ot that amount.

Living in the property for two years would qualify you for the primary residence exclusion, of $250K or $500K. There are other things to consider, too, such as property tax reassessment.

Re: taxes on inherited property

In addition to income tax, there are two taxes at play. The first is the estate tax which does not apply unless the person died in 2002/2003 and had an estate over $1 million, or died more recently with an estate over $1.5 million. The estate tax is in excess of 40% of the amount above the $1.0/1.5 million limit.

Capital Gains is the second tax. The capital gains tax is a tax that taxes the difference between the purchase price (the "basis") and the sales price -- in another words taxed on the "gain" of the value of the property. When a person dies, the "basis" is "stepped-up" to the fair market value at time of death. In short, all "gain" prior to death is no longer counted. Thus when the property is sold, any gains tax will only be on the difference between the fair market value at the time of death and the sales price.

I hope I have answered your question. Please realized that this information is for informational purposes only and should not be relied upon.

If you have any questions, please do not hesitate to contact me at (408) 268-2580.

Sincerely,

Kai H. Wessels, Esq.

Re: taxes on inherited property

Currently the federal estate taxes begin when the estate is over $1.5 million dollars, if the owner died in 2005. States may have their own inheritance taxes as well--California just takes part of the federal estate tax paid.

Capital gains are another issue--inherited property usually gets a "step-up" in basis to the fair market value at the time of death, so any gains from a later sale are calculated using that new basis. If the person who inherited the property then lived there long enough to qualify for the principal residence $250,000 exclusion, that could apply to the sale as well.

Re: taxes on inherited property

you should consult a tax attorney, cpa or enrolled agent for specific advice related to your situation. in general, however:

1. there may be estate tax to be paid by the decedent's estate depending upon the value of the total estate

2. the recipient of an inheritance is not subject to estate or inheritance tax

3. the income tax basis is stepped up to the fair market value at the date of death (or an alternate date 9 months later which can be elected by the decedent's estate if a federal estate tax return is filed)

4. any capital gain can be reduced by the applicable exclusion if the recipient lives in the property for the requisite period and satisfies the other conditions for sale of a personal residence

5. if the real property was the residence of the decedent and the recipient is a child (grandchild if the child is not living) or parent of the decedent, real property tax reassessment can be avoided by claiming the applicable exclusion.

6. if the real property was not the residence of the decedent and the recipient is a child (grandchild if the child is not living) or parent of the decedent, up to $1,000,000 in value can be excluded from reassessment by claiming the applicable exclusion.