If you sell property that you have inherited, the sale is generally considered the sale of a capital asset and may be subject to capital gains (or loss) treatment. According to IRC §1014, the basis of property acquired from a decedent is its fair market value (FMV) at the date of the decedent's death. This means that if you sell the property soon after inheriting it, there is usually little or no gain to account for, as the basis is stepped up to the FMV at the date of death.
Here are the key points to consider:
- Basis Determination: The basis of inherited property is generally the FMV at the date of the decedent's death. Alternatively, if the executor of the estate elects to use the alternate valuation date, the basis would be the FMV on that date. This election is made on the estate tax return (Form 706).
- Capital Gains or Losses: If you sell the inherited property for more than your basis (FMV at the date of death or alternate valuation date), you will have a taxable gain. Conversely, if you sell it for less than your basis, you will have a deductible loss.
- Reporting the Sale: The sale of inherited property must be reported on Schedule D (Form 1040), Capital Gains and Losses, and on Form 8949, Sales and Other Dispositions of Capital Assets.
- Special Rules for 2010 Decedents: For estates of decedents who died in 2010, there was a special election available where the executor could opt out of the Federal estate tax rules and use modified carryover basis rules. This allowed the basis of certain property to be increased by up to $1.3 million (plus certain unused built-in losses and loss carryovers), but not exceeding the FMV at the date of death.
- Accuracy-Related Penalty: An accuracy-related penalty may apply if an individual reporting the sale of inherited property uses a basis in excess of the property’s final value for Federal estate tax purposes.
- Income in Respect of a Decedent: If the property sold was income in respect of a decedent (such as a right to receive income that the decedent was entitled to but did not receive before death), the income is included in the gross income of the estate or the recipient.
In summary, selling inherited property involves determining the basis, which is typically the FMV at the date of death, and reporting any capital gains or losses from the sale. Special rules and elections may apply depending on the circumstances of the decedent's estate.
Sources:
Rev. Rul. 69-83
Publication 559 (2023)
Rev. Rul. 82-1
Publication 551 (12/2022)
