The tax consequences when selling a house inherited in Chicago can be hard to understand and untangle much of the time.
The relevant laws may seem fairly simple at first glance, but they get complicated when you factor in all the legal conditions and nuances. The short version is that if you made gains, you’ll owe taxes, and if you had a loss, you may have a tax deduction.
But then it gets complicated because whether you made a profit or had a loss also depends on when the decedent died and the use you made of the house.
What Are the Tax Consequences When Selling a House Inherited in Chicago?
Capital Gains or Losses Taxes
The tax consequences when selling a house inherited in Chicago include being subject to capital gains taxes. Capital gains or losses are those that stem from the sale of items you use for personal or investment purposes, such as stocks or a house. So for income tax purposes, the sale of an inherited house in Chicago is treated as a capital gain or loss.
The catch with selling an inherited house is that a gain or loss is considered a long-term gain or loss. Further, losses on personal property cannot be claimed as a tax deduction. So if you ever used the inherited house as your personal home, it became personal property, and you can’t deduct a loss if you sell it.
Reporting the Inherited House
In some cases, the executor has to file an estate tax return to report the inherited house. But this is only if the estate exceeds the inflation-adjusted exemption amount.
The determination of the gain or loss on a house sale depends on the “basis” of the house. As the basis goes higher, the taxable gain from a sale decreases. There are, however, different rules for the sale of an inherited house that allow for a special stepped-up basis.
“Basis” Determination
The cost basis is the number you will start with to determine your overall tax liability when selling the house. This number is the actual fair market value of the house on the date the decedent passed away. Since you legally inherited the property the day your loved one passed away the value of the house at your legal date of inheritance will be your cost basis for calculating your tax proceeds. A common misconception here is that you will be responsible for paying taxes on any gains received from the date the decedent purchased the property however that is not the case.
You may be able to receive a tax deduction from selling the property if your sale price is lower than your cost basis (the fair market value at the date of death). However, there specific rules that may disqualify you from receiving this deduction. Be sure to check with your tax professional if you would qualify for the deduction as well as how much you would be able to deduct.
Reporting Sale of the Inherited House
Obviously, when you sell an inherited house, you have to report the sale (and gains or losses) when you file your income tax return. To calculate the gain or loss, you have to subtract the basis from what you received for the sale.
To report the gain or loss, you need to use the standard document for this purpose, the IRS Schedule D. You also have to include the gain or loss on your personal Form 1040 tax return. And make sure you use the Form 1040 (and not the Form 1040A or Form 1040EZ) for the year in which you sold the inherited house.
The tax consequences when selling a house inherited in Chicago can be complex and difficult to understand at best.It’s usually a good idea to find a professional to help you navigate the tax waters.