How Can You Avoid Paying Capital Gains Tax on Inherited Property?
Updated: Sep 12
You just got some property from an inheritance from a family member. Time to sell it and make some money on it, right? Not so fast.
There is always a catch. You could wind up being hit with significant capital gains tax. This happens if the property has gained more value since the original owner bought it.
There are ways to possibly avoid paying it. We are here with property tax help so that you might be able to keep that money in your pocket.
What Is Capital Gains Tax and How Is It Calculated?
Your capital gains tax will be called one of two things: Short-term or Long-term capital gains. The short-term is for if you held the property for under a year. The long-term tax is for more than a year.
If you are going to pay this tax, you would rather pay the long-term one since the interest rate will be lower than the short-term one. So, it would be better, in the long run, to hold onto the property. Sometimes that isn’t possible - so try the next best thing.
Sell The Property Immediately
You can attempt to keep the amount of time between your getting the property in the inheritance and when you sell it to a minimum. Your property can’t get any more valuable in that time frame. But it can backfire.
The biggest reason is that you might have a family attachment to it - perhaps your parents’ owned it before and you want to keep it in your own family. That would keep you from selling it that quickly.
Also, it depends on how the market is. It might be a cold one rather than a hot one … and unless you have a buyer lined up right away, that could cause you to have to wait. This would be added stress for you while trying to calculate the possible capital gains tax.
Live In The Property
Rather than have to go through the whole sales process, why not move into it and make it your home? Especially if it is your childhood home. That way, you can have good memories.
If you don’t want to make it a permanent residence, you could live in it for two years and then sell it. That way, you could remove a good chunk of or even all of the capital gains tax since you will have been there for two of the five years before the sale of the house.
That might not be completely feasible, though. You might live in another state and the process of moving there might not be worth it. Also, it also depends on the neighborhood your property is in.
Another issue is that you might have to sell the other property you live in if you can’t handle having two places. That can take time and cost you money. Only do this if you are ready.
Rent Out The Property
This is an option if you want to keep the property and not live in it. You could make some money in the process. You would not be able to fully avoid paying capital gains tax when selling it, but there are ways to defer it especially if you buy another investment property when you sell the current property.
One thing about this suggestion though - you are going to be the landlord for this property. You are going to have to handle any problems that arise in it. Something broke? You are going to have to fix it. That can cost you more than you anticipated … and the money coming in from the renters might not be able to cover some costs.
There is one way that you can definitely avoid paying capital gains tax - not accept the property. Doing this is known as disclaiming an inheritance. The thing about doing this, though, is that once you do it, you won’t be able to change your mind.
The property will be gone and any chance of getting any profit later will also have disappeared. The next person in line will have gotten it and chances are good that they won’t want to share anything with you.
Ultimately, capital gains tax is just one of the taxes that you may have to pay when you do sell your property. Other ones include the state inheritance tax. You may decide to live in it or rent it to others. You could always leave it in your own will for someone in your own family to inherit.
Taxes are always complex to decipher. This is why it is good to have good tax lawyers to guide you. Do not try to go through this yourself. Otherwise, you risk possibly losing even more money in the long run.