Is the Sale of an Inherited Property at a Loss Actually Good?

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Inheritance is an emotionally and financially challenging topic to discuss or endure.

Many people who have recently inherited a home that they don’t want to keep can become overwhelmed with the reality of having to sell their newly acquired asset.

But there is an upside: If you, as the seller, take less than the market value for the home, you can likely sell the home quickly and might not have to pay capital gains tax — a win-win scenario.

Discover how the sale of an inherited property at a loss can actually be a blessing in disguise.

How Much Is Capital Gains Tax on Inherited Property?

When you sell an asset for more than you paid for it, the profit is called a capital gain. In layman’s terms, a capital gains tax is a tax calculated on the profit of an asset after it is sold.

Short-term capital gains tax refers to profits on assets that are sold within a year of ownership, such as an unwanted inherited home, and this type of capital gain is usually treated the same as additional wages or income.

It is important to note that the tax rate will range from 0 to 20 percent, depending on your tax bracket. In the case of inherited properties, capital gains tax is applied when a home is sold above the market value rather than above the purchase price since you didn’t actually purchase anything.

To avoid these potentially hefty taxes, you can instead choose to sell your home at a loss, i.e. below market value. If there is no profit, there is no capital gains tax.

If you have inherited a property that has increased in value since its original purchase, then you might consider using a step-up basis.

A step-up basis readjusts the value of the inherited home so that capital gains are applied based on the home’s value when you received it, not the original purchase price.

This is beneficial to sellers because the property likely appreciated from the time it was purchased until the time it was passed on to you and you do not want to be held responsible for such a large capital gain on a property you just received.

As part of the step-up basis, the beneficiary’s capital gains tax is minimized. In short, capital gains taxes are based on the market value of the home, not the selling price. If you sell the home for more than market value, you will have to pay the capital gains tax.

How to Avoid Paying Capital Gains Tax on Inherited Property

There are a few easy ways that you can avoid paying capital gains tax on an inherited property.

First, you could sell the home quickly far below the market value. Alternatively, you could live in the home as your primary residence for at least two years, before claiming a capital gains exemption when selling the home.

By employing this long term strategy, you could potentially be exempt for up to $250,000 as a single person or up to $500,000 if you file taxes as a married couple.

If you don’t want to wait for two years, and you don’t want to pay hefty capital gains tax, then selling the home for less than market value may allow you to walk away with the most money in your pocket.

sale of inherited property at a loss

The Sale of Inherited Property at a Loss Can Actually Be a Convenient Solution

Not only can selling inherited property at a capital loss help you avoid capital gains tax, but it can also save you time and money.

By selling the home in as-is condition, you can receive a cash offer without needing to put any work or funds into preparing the home to be listed on the market.

When you sell the inherited property as-is you don’t have to stress about home improvement, maintenance, curb appeal, or listing your home on the MLS. Instead, you can save time and enjoy the convenience of accepting a cash offer from a third party, which will help you qualify for an arm’s length transaction.

The arm’s length transaction means that the buyer and seller have no prior relationship. It is also one of the four criteria that you will need to meet to claim a capital loss on your inherited property. The other three criteria include:

  • The home is being sold at a fair market value that is less than the inherited value
  • The home hasn’t been used by you (or your siblings) for personal purposes
  • The property was not used for personal use before the sale

If the above criteria are met, then you can typically claim a loss on the sale of your inherited property and avoid the capital gains tax expense.

Make the Most of Your Inheritance With a Cash Offer From HomeGo

Avoid the stress of home maintenance, staging, and the traditional real estate sales process when you sell your home for cash to HomeGo. If you sell your home below market value, then you can also enjoy the monetary benefits of no capital gains tax.

Say goodbye to costly upgrades and repairs, and hello to a same-day cash offer with a closing in as little as 7 days. Get the most out of your inherited property with HomeGo.

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The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only.

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