How to Figure Capital Gains Tax on Inherited Property
Understanding how to figure capital gains tax on inherited property is crucial for anyone who has received an inheritance. Capital gains tax is a tax on the profit made from selling an asset, and when it comes to inherited property, it can be a bit more complex. Here’s a step-by-step guide to help you navigate this process.
1. Determine the Fair Market Value (FMV) of the Property
The first step in calculating capital gains tax on inherited property is to determine its fair market value (FMV) on the date of the inheritor’s death. This is the price that the property would sell for on the open market, and it’s often used as the basis for calculating the capital gains tax. The executor of the estate or a professional appraiser can help you determine the FMV.
2. Calculate the Basis
The basis of an inherited property is typically the FMV of the property on the date of the deceased owner’s death. This basis is used to calculate the capital gain or loss when the property is sold. If the property is sold for more than the basis, there will be a capital gain; if it’s sold for less, there will be a capital loss.
3. Determine the Selling Price
Next, you need to determine the selling price of the inherited property. This is the amount you received when you sold the property. It’s important to note that any improvements you make to the property can increase its selling price.
4. Calculate the Capital Gain
To calculate the capital gain, subtract the basis from the selling price. If the result is positive, you have a capital gain. For example, if the basis is $200,000 and you sell the property for $250,000, your capital gain is $50,000.
5. Determine the Capital Gains Tax Rate
The capital gains tax rate depends on several factors, including your taxable income and whether the property was held for more than a year. For long-term capital gains, the tax rate can be 0%, 15%, or 20%, depending on your income level. For short-term capital gains, the rate is usually the same as your ordinary income tax rate.
6. Calculate the Capital Gains Tax
Once you know the capital gains tax rate, you can calculate the tax amount by multiplying the capital gain by the applicable tax rate. In our previous example, if the capital gain is $50,000 and the tax rate is 15%, the capital gains tax would be $7,500.
7. File the Necessary Tax Returns
Finally, you’ll need to file the appropriate tax returns to report the capital gains tax. If you’re selling the inherited property, you’ll need to file Form 1040 and Schedule D. If the property was sold through an estate, the executor may need to file Form 706.
Understanding how to figure capital gains tax on inherited property can help you navigate the tax implications of your inheritance. By following these steps and consulting with a tax professional, you can ensure that you accurately calculate and report your capital gains tax.
