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It’s never easy to deal with the loss of a loved one, but inheriting their property can be a great help. However, since you got this property as a result of someone’s death, you need to pay some attention to avoid having problems in the future. We all know that when we inherit another person’s property, capital gains tax may be triggered by that transaction.
In fact, if you are not careful and don’t take the right steps, you may end paying this tax from your inheritance. Read on to know more about how to avoid paying capital gains tax on inherited property.
What is Capital Gains Tax?
Capital gains tax is a tax on the profit you earn when you sell assets. The most common assets that trigger capital gains tax are stocks and real estate. So, if you buy an asset and sell it for a profit, you have to pay capital gains tax.
You might be wondering why you should care about capital gains tax. Well, in order to avoid paying capital gains tax on inherited property, you need to know when the tax is triggered and how to avoid it. In this article, we will discuss this in detail.
Exclusion of Inherited Property
If you inherit property, you don’t have to pay capital gains tax on it. The property is not considered to be a sale. The reason is that you are not actively trading it. Instead, you are receiving it as a gift.
When you receive the property, you need to inform the Internal Revenue Service. You can do that through form 8939. You need to provide details about the property including the date you received it, the fair market value, and the basis of the property.
You need to file this form whether you are the sole beneficiary or part of a group of beneficiaries. You can file this form on the same date you file your taxes.
Strategies to avoid paying Capital Gains Tax on inherited property
There are some strategies that you can use to avoid paying capital gains tax on inherited property. These include: – Investing the money in a new property – If you plan to keep the inherited property, you can avoid paying capital gains tax by investing the proceeds from the inheritance in a new property. This is because you are not selling the inherited property.
So, you don’t have to pay capital gains tax on it. – Raising the basis of the inherited property – If you inherited an appreciated property, you can lower the capital gains tax that you may owe by raising the basis of the property. You can do this by improving the property and adding value to it.
For example, if you inherited a piece of land that has increased in value, you can lower the capital gains tax by clearing the land and building a house on it. Deferring the sale of the inherited property If you inherit a property and want to sell it, you can use some strategies to defer the capital gains tax. For example, you can rent out the property and use the rent to pay off the mortgage. The proceeds from the sale of the property will be tax-free.
Tips to help you avoid paying capital gains tax on inherited property
There are some tips that can help you avoid paying capital gains tax on inherited property. These include: – Decide what to do with the inherited property – The first step to avoid paying capital gains tax is to decide what to do with the property.
If the property has some sentimental value for you, you can keep it. But if you don’t want to keep the property, you can sell it. You just have to make sure that you don’t sell it at a profit. – Don’t rush into selling the inherited property – Many people rush into selling the inherited property as soon as they inherit it.
However, you may not have to sell the property. You can rent it and use the rent to pay off the mortgage. – Get professional advice – Finally, you should get professional advice. You should get help from a financial advisor and an accountant. They can help you understand the tax implications of your inheritance and suggest ways to avoid paying capital gains tax.
Conclusion
Capital gains tax can be a big problem when you inherit a property. You can avoid this by following the tips mentioned above. You can also discuss these tips with the family members of the person who left you the property.
When you inherit a property, you don’t have to sell it and pay capital gains tax on the profit. You can invest the proceeds in a new property and avoid paying any tax on it. So, if you received a property as an inheritance, don’t rush into selling it. Instead, use it to generate income or invest in a new property.
