Inheriting property can be a complex process, with numerous factors to consider. Before you decide whether to keep, donate, or sell your inherited property, it’s important to understand the fair market value of the asset, which is its estimated worth on the open market.
Is Fair Market Value Calculated at the Time of Death?
Yes, for tax purposes, the fair market value (FMV) of inherited property is typically calculated at the time of death.
If you sell inherited property, you may be subject to income taxes on any capital gains. This means that, if you sell the property for more than your “cost basis,” you will have to pay taxes on the difference. In most instances, the cost basis of inherited property will be its FMV on the date that the deceased person passed away.
What Is the Cost Basis of an Inherited House?
The cost basis of an inherited house is typically the home’s fair market value (FMV) on the date of death.
In some instances, the cost basis will be the FMV of the house on an alternate valuation date. However, this exception only applies if the executor of the estate submits an estate tax return to the IRS that uses an alternate valuation.
How Do You Calculate Gains on the Sale of Inherited Property?
In general, capital gains are calculated as follows: Gain = Selling Price – Original Cost Basis.
In other words, if you sell the property for more than its basis, you will have a taxable gain.
When someone purchases property and later sells it, their “original cost basis” will be the original purchase price. So, if someone buys an investment property for $100,000 and later sells it for $300,000, their taxable capital gain will be $200,000.
However, when you calculate gains on the sale of inherited property, you use a “stepped-up original cost basis” instead of the original purchase prices. This stepped-up basis is typically the fair market value (FMV) of the property on the date of the owner’s death or an alternate valuation date elected by the executor of the estate.
So if you inherit a property that was originally purchased for $100,000 and immediately sell it for its FMV of $300,000, you will not have any taxable gains. On the other hand, if you sell it for $350,000, you will have to pay income taxes on your $50,000 gain.
Does an Executor Sell Property at Market Value?
In general, executors must sell property at market value, or at least as close to market value as possible.
While the specific requirements placed on executors vary among states, executors always have a “fiduciary duty” to the estates they administer and their beneficiaries.This means they must always act in the best interests of the beneficiaries and deal in good faith.
For instance, under California law, a personal representative can typically sell real and personal property when:
- The sale is necessary to pay debts;
- The sale is advantageous to the estate and beneficiaries;
- The will directs the property be sold; or
- The will gives the executor the authority to sell the property.
However, the authority an executor has to sell property can be limited by the will and orders issued by the probate court, and, in all cases, they must abide by the fiduciary duty to the estate beneficiaries when making the sale. Typically, this means selling the property for at least 90% of the fair market value in order to avoid a potential surcharge for the difference.
Can I Stop the Sale of Inherited Property?
Once someone has inherited property, they are generally free to do what they want with it. However, there may be some situations where you can stop the sale of property during the administration of an estate before anyone legally “inherits” it.
This is an issue that commonly arises when multiple siblings jointly inherit the family home and there is disagreement as to whether to keep the home or sell it. Likewise, you may face similar concerns if someone else is designated to inherit a property that you want to keep.
Often, the best solution to this type of dispute is to try to reach an agreement outside of the courtroom. For instance, the sibling that wants to keep the home may be able to buy out the other siblings outright or offset the cost of the home with other assets they are supposed to inherit from the estate.
Even if you want to try to reach an out-of-court settlement, it’s essential to discuss your situation with a knowledgeable probate litigation attorney. They will be able to advise you on the likelihood of success if it becomes necessary to pursue legal action, which will help you make informed decisions on how to proceed. A lawyer will also be able to help you negotiate an agreement that stops the sale of the property in question.
No matter how complex your situation may seem, a qualified attorney will be able to help you find a resolution that works for everyone involved. If you are facing a dispute over who should inherit a home, contact an experienced probate litigation lawyer as soon as possible.
Have questions? We’re happy to discuss.
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About RMO Lawyers, LLP
RMO LLP provides personal and efficient inheritance dispute services to individual and institutional clients. The firm’s attorneys focus on probate litigation involving contested trust, estate, probate, and conservatorship matters. Serving California and Texas, with offices in Los Angeles, Pasadena, Orange County, San Diego, Fresno, the Bay Area, Dallas, and Houston. For more information, please visit https://rmolawyers.com/.