Tax codes, in general, are not easy to understand. Now, with the new tax bill, you want to make sure that you have a good accountant who is looking out for your best interest.
Most people think that only large estates are affected by taxes. It is important to note that sometimes even smaller ones have tax implications.
Estate Taxes and Inheritance Taxes Are Not the Same
According to the IRS: “Estate tax is a tax that is based on the net value of the property owned by the deceased. When the assets are transferred to the beneficiary, estate tax comes into play. This tax has nothing to do with the person who inherits the assets.
Inheritance tax, on the other hand, is imposed by state governments and the tax rate depends on the person receiving the property, and in some jurisdictions, how much they receive.”
You will need to see what the tax laws are in the state where you live to determine the exact implications and ramifications of any money you inherit.
The New Tax Plan
Prior to the passage of the new tax bill, only estates worth more than $5.49 million for individuals and $10.98 million for married couples were taxed.
According to the new tax bill, between 2018 and 2026, the exemption base almost doubles to $10 million for individuals, $22 million for couples, and will be indexed for inflation.
If you inherit assets worth less than these amounts, you will not have to pay estate taxes to the government.
Is Your Inheritance Considered Taxable Income?
If you inherit cash, investments, or property, the inheritance itself is not considered taxable income for federal tax purposes.
However, if you earn additional money from your inherited assets, you do have a tax liability. You will be required to pay taxes for interest earnings on inherited cash or dividends on inherited stocks.
Options for Inherited Houses
If someone you love dies and leaves you their home, you will be faced with three questions.
- Should I sell my inherited house?
- Should I keep it and move in?
- Should I rent it out?
Selling the House
If you grew up in the house, you might want to keep it for emotional reasons. If you have siblings who were left part of the inherited house, obviously you will all have to agree that selling is your best option.
Check with your accountant and state laws for all tax implications because tax laws vary from state to state.
Once you make the decision to sell the house, you will need to prepare it for sale. This can be a very emotional time as you clear out your loved one’s personal belongs.
Some of the items in the house will have been left to specific loved ones via the will. The other possessions will need to either be given to family members or sold.
You might want to have a yard or estate sale for items no one in the family wants or needs. Keep in mind that in some circumstances, you might have to wait until the home goes through probate before selling it.
You can either sell the home by yourself or hire a real estate agent. If you hire an agent, they can help you price the house appropriately.
Keeping Your Inherited Home
Losing a loved one is hard enough, don’t feel like you have to rush into making a decision. Hopefully, if you have siblings, you can all agree to take the time needed to think clearly about your options.
If you are an only child, your decision will be easier to make. You will still have to consider all the financial obligations and tax implications. However, the decision will be yours and doesn’t have to be a consensus among many.
If you don’t currently own a house, deciding to move into your inherited home could be a good idea for you.
Renting the Home
All other things being equal, renting might be a good decision for you. If you aren’t emotionally ready to sell your loved one’s home, renting it out will allow you to keep it and make a little extra money in the process.
You might want to consider the real estate market in your area. If houses are not moving or selling too low, renting might be a better financial option.
Don’t forget to check with your accountant about the tax implications and obligations so you are financially prepared for any decisions you make.