Q&A: Is there an estate tax exemption when selling inherited real estate?
QUESTION:
My siblings and I inherited a parcel of land from our parents. We are in the process of selling it, and I was told you can receive up to $250,000 in a lifetime and not have to pay taxes on any capital gains. Is this correct?
ANSWER:
ESTATE AND INCOME TAX
It is important to distinguish the difference between an estate tax and income tax (which includes capital gains).
An estate tax is a tax on the net value of the estate of a deceased person before any distribution to the heirs. An income tax is a tax directly on earned and unearned income (including capital gains).
In addition to federal estate taxes, Minnesota has its own estate tax.
FEDERAL ESTATE TAX
The federal estate tax exemption is $12,060,000 for Tax Year 2022, up from $11,700,000 in 2021. This means that a married couple will have $24,120,000 of available exemption for Tax Year 2022, up from $23,400,000 in 2021.
MINNESOTA ESTATE TAX
The Minnesota estate tax exemption will remain at $3,000,000 for decedents dying in 2022.
CAPITAL GAINS ON HOME SALES
It sounds like what you’re referring to is capital gains tax on the sale of a home. When you sell your primary residence, you may exclude up to $250,000 of your capital gain from tax. For married couples filing jointly, the exclusion is $500,000. But, the property you’re selling must be your principal residence, and you also must live in that principal residence for two of the five years before you sell it.
Now when you inherit property, such as a house, the property is usually worth more than it was when the original owner purchased it. So, if you were to sell the property, there could be substantial capital gains taxes. Fortunately, when you inherit property, the property’s tax basis is “stepped up,” which means the basis is typically (though not always) the fair market value of the property on the date of the decedent’s death, so it is possible there is little or no gain to account for if the sale occurs soon after the date of death.
I strongly encourage you to consult with an attorney regarding specific tax liabilities.