If each of you own 1/3 of the house, then you would each have a long term capital gain equal to 1/3 of the sale price (reduced by closing costs) in excess of the property's basis. The basis would be the fair market value as of the date of your inheritance plus the costs of any improvements made since that time.
For example...if the sale price is $500,000, based on the typical closing costs of approximately 7%, your net proceeds would be $465,000...which, divided by 3, would mean $155,000 for each of you. The basis for each of you, presuming no improvements, would be the $385,000 divided by 3 which is $128,333 each. Thus you would each have a long term capital gain of $26,667. Your sister that lives there as her primary residence would be able to exclude all her gain under Section 121 of the Internal Revenue Code allowing an exclusion of gain up to $250,000 from the sale of their principal residence. You and your sister that don't live there would not be eligible
As far as you and your sister subject to tax. Virginia's tax rate on long term capital gain is 5.57%..for which you will get credit on your Federal tax return.
The Federal tax laws concerning taxation of long term capital gains are as follows:
0% applies to long-term gains and dividend income if a person is in the 10% and 15% tax brackets,
15% applies to long-term gains and dividend income if a person is in the 25%, 28%, 33%, or 35% tax brackets, and
20% applies to long-term gains and dividend income if a person is in the 39.6% tax bracket.
In addition, starting in 2013, capital gain income became subject to an additional 3.8% Medicare tax for taxpayers with income at or above a certain threshold. This 3.8% Medicare surtax applies to taxpayers with “net investment income” in excess of threshold income amounts of $200,000 for single filers and $250,000 for married couples filing jointly.
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