When you inherit a piece of real estate from your parents upon their passing, you may not want to keep it. Say you and your family have your own family home in Grand Rapids, and your parents lived in Traverse City, in what used to be your family cottage. They moved to it when they retired. They leave you the home, but you’re not interested in a second home or in moving, so you decide to sell.
Your concern is that you’re going to have to pay a lot in capital gains taxes. You know that your own parents bought that house when it was worth just $50,000, but it’s worth ten times that much today. Are you going to have to pay capital gains on $450,000?
You will not. The IRS is going to step up the value of that house to whatever it was worth when your parents left it to you. This can mean that you have to pay far more in property taxes than they did, but it also adjusts the value if you decide to sell.
Say the IRS values the home at $400,000. You are able to sell it for $500,000 in a hot market a few months later. You did earn that $450,000 more than the original price, but you only sold it for $100,000 more than the new value. You are only going to be taxed on the extra $100,000.
Exploring your options
Whether you’re drafting an estate plan or deciding what to do with a home your inherited, make sure you explore all of the options you have.