September 2021 Question Of The Month

By Admin Prepare

September 8, 2021

“My father died last year, and my brother and I inherited his house through his will. Will we need to pay taxes when we sell it? If so, what is the best way to sell the house to minimize or avoid taxes on that sale? Also, are there any specific timelines we need to follow?” Thank you. Rhonda

I’m sorry to hear of your father’s passing. As you are aware, dealing with a passing involves both emotional and family issues as well as financial responsibilities and decision making. And, of course, you don’t want to make irrational decisions on important financial matters when your mind is elsewhere and dealing with a loss. That is why is it so important to have the proper professional help in place to give you the proper advice and information that is in your best interest.

When you sell an asset, like a stock, asset or property, you have a cost basis. This is the amount that you paid for the asset plus the cost of any improvements made since then. When you sell that asset, you calculate the capital gains by subtracting the asset’s basis from the sale price of the asset. If that calculation produces a positive number, you recorded a gain, and if it’s negative, it’s a loss.

The calculation works a little bit differently when it comes to property that’s inherited. Heirs are granted a “step-up” in basis. What that means is that rather than using the home’s value from when it was originally purchased to calculate the capital gain, you use its market value at the time of their death. This is a major help to children who are selling their late parents’ homes because it drastically reduces their potential capital gains. Let’s say your father purchased the home for $100,000, but it was worth $400,000 on the day he died. If you sold it today for $450,000, the capital gain would be just $50,000 rather than $350,000 because of the “stepped-up” basis. You would only owe taxes on that $50,000, not the full sale price of the home.

So depending on what the home was worth when your father died last year, and what you could sell it for now, you and your brother may not be facing much of a tax bill. Of course, many towns and cities across the country have seen home prices skyrocket over the past year, which may increase how much of a tax bill you’re facing.

There are a handful of ways you can reduce the tax liability for the property. We cannot get into all those options in this article, but depending on your situation, there may be some options to reduce or eliminate any capital gains tax. For example, if you both wanted to use the value of the home to purchase a rental property, you could reinvest the proceeds into another property via a 1031 exchange. This would delay the capital gains tax until a later time.

Again, it is critically important to have the proper professional help in place to examine your situation and advise you properly on all your options. To learn more about this and many other retirement planning topics, visit the Prepare Institute website ( to find a retirement course or class near you.