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Tax implications of inheriting or gifting a property


Inheriting or gifting property can be a generous gesture, marking significant milestones or occasions. However, the transfer of real estate isn't just a straightforward transaction; there are tax consequences to consider for both the giver and the recipient.

Inheriting a Property

When you inherit property, several tax considerations come into play:

  1. Stepped-Up Basis: One of the primary benefits of inheriting property is the "stepped-up basis." This means that the property's cost basis (the original value used to determine profit or loss upon sale) is adjusted to its fair market value at the time of the previous owner's death. This can significantly reduce potential capital gains taxes if the property has appreciated over time.

  2. Estate Tax: Depending on the overall value of the deceased's estate, there might be federal estate taxes due. However, as of my last update in September 2021, only estates valued at more than $11.7 million for individuals (or double that for married couples) were subject to the federal estate tax. State estate or inheritance taxes might also apply, and the thresholds can be much lower than the federal limit.

  3. Future Sales and Capital Gains: If you decide to sell the inherited property, you'll only pay capital gains tax on the difference between the sale price and the stepped-up basis. This can result in significant tax savings compared to if you had purchased the property yourself.

Gifting a Property

Gifting a property, on the other hand, has a different set of tax implications:

  1. Gift Tax: When you give someone a property, it might trigger the federal gift tax. However, there's an annual exclusion amount, which was $15,000 per recipient in 2021. Any gift value above this requires filing a gift tax return, and while it may not result in immediate taxes due (thanks to a lifetime gift tax exemption that mirrors the estate tax exemption), it can reduce the amount shielded from future estate taxes.

  2. Carryover Basis: Unlike inherited property, gifted property carries over its cost basis. So, if the person receiving the gift decides to sell the property, they'll use the original cost basis of the person who gifted it to them to calculate capital gains.

  3. Future Sales and Capital Gains: The recipient will potentially face a higher capital gains tax if the property has appreciated significantly since its original purchase, due to the carryover basis.

In both scenarios, the local property tax situation can also change, as some jurisdictions reassess property values upon transfer, potentially leading to higher annual property tax bills.

When contemplating gifting or inheriting property, it's wise to engage with a tax professional. They can provide insights tailored to your situation, helping ensure that you make the most informed decision and understand any tax obligations or benefits.

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