How much tax do you have to pay when you sell an inherited home?
If you inherit a home and sell it at a later date, you will need to pay capital gains tax based on the value of the home on the date of the owner's death otherwise known as the 'stepped-up' basis.
For example, if you inherit a relatives house and it was worth $500,000 when they passed away, and you sold it later for $550,000, you would subtract the stepped-up basis of the home ($500,000) from the sales price ($550,000) to determine the taxable gain ($50,000). Therefore, you would have to pay tax on the $50,000 gain.
What if you sold the home at a loss?
If you unfortunately sold the home for less than the stepped-up basis, you can deduct the loss amount up to $3,000 per year. (Any more than that can be rolled over to next year to be deducted.)
What about home improvements on an inherited house?
In most cases when you inherited a house they typically are outdated and need improvements. The good news is that you can use those improvements to reduce your tax bill and potentially increase your profit. If you do decide to make some updates, you can subtract that amount from any capital gains taxes you owe when selling the property. So make sure to keep track of those receipts.