Tips on How To Claim a Loss on the Sale of an Inherited Property for Tax Purposes

How To Claim a Loss on the Sale of an Inherited Property for Tax Purposes Efficiently

In case you’ve decided to sell your inherited real estate, you need to be careful about making a profit in the sale process. What if you have made a loss? You might be able to claim it on your taxes.

will show you how to claim a loss on the sale of an inherited property for tax purposes.

What Is Capital Gains Tax?

Capital gains tax is a tax you need to pay on any profit you make from the sale of your inherited property. How much you need to pay for capital gains depends on what you decide to do with the inherited house.

You should know that fixing it up will raise its market value and lead to higher capital gains tax when you decide to sell the inherited property.

How To Avoid Capital Gains Tax

If you choose to sell the inherited real estate the moment you obtain it, you will not have to pay capital gains tax on that sale.

Make sure you check the capital gains tax exemption before you decide to sell your inherited property, as this tax rule can easily change.

Do You Owe Tax From the Sale of Your Inherited Property?

When a person dies, the executor of the estate or a representative needs to file final tax returns. The representative must include the property transfer to you on the final tax returns.

When you are the owner of an inherited home, you need to list all gains and losses on your annual tax return. You can claim a:

  1. Gain if you have made a profit from the sale of your inherited property
  2. Loss unless you used the inherited home as your residence

All inherited properties qualify for the government’s lower property tax rates.

What Is the Principle of an Inherited Property?

The basis of an inherited property is the fair market value (FMV) of an inherited home:

  • At the time of the original owner’s death—the executor of the estate does not have to file an estate tax return
  • On the alternate valuation date—the executor of the state must file an estate tax return and choose to use the alternate valuation on the return

You should contact the executor of the estate to find out the FMV of your inherited property.

This basis helps you determine what gains or losses you had on the sale of an inherited property. To make it easier to understand, take a look at this example:

Original PriceFMV When Inherited/BasisSale PriceTaxable Gain

The Internal Revenue Services (IRS) will tax you only on the gains you have made, not the total sale price.

When Can You Claim a Loss on the Sale of an Inherited Property for Tax Purposes?

You can claim a loss on the sale of an inherited property if you and your siblings:

  • Sold the house at the FMV that is less than the inherited value
  • Have not used the inherited home for personal purposes
  • Used an arm’s length transaction to sell your inherited property
  • Did not plan to convert the inherited home to a personal residence before the sale

In case you fulfill these requirements, you can:

  • Avoid the capital gains tax expense
  • Claim a loss on the inherited property sale

When To Report a Gain or Loss From the Sale of an Inherited Home

Once you have sold the inherited property, you need to report it to the IRS. Here is how you can do it:

  1. Calculate the gain or loss from the sale
  2. Report it on the following forms:
  3. Attach these two forms to your personal tax return

Bear in mind that you need to report the sale of your inherited property the same year you sell it.

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