Is the sale of the deceased parents house(less than $250,000 to be divided equally between 2 brothers subject to "income tax". Both federal and NJ State. (Amount not subject to inheritance tax in NJ.)
Optional Information: Rockaway, New Jersey
Capital gain on sale of the house is subject to both, Federal and State tax.
What do you mean by (Amount not subject to Inheritance Tax in NJ.)?
When did you inherit the house from your parent?
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CPA, MBA, Over 10 yrs of experience in tax planning and business consulting..
The inheritance of the house is not subject to Income Tax or inheritance tax.
However, you may be subject to capital gains tax when you sell the porperty.
Capital gains tax will be the gain after subracting the cost basis of the home from the sell price, and subtracting closing costs, commissions and cost of selling the home.
The initial cost basis of the home will be the Fair Market Value of the home at the time of death. You can find the FMV listed on the estate income tax return.
If the sell is at the fmv, then no gain is realized and you owe no taxes. If the sell is for more than the FMV, then there will be a gain, minus expenses that you would be liable for capital gains.
Reply to Ed Johnson's Post: There is no inheritance tax in this situation as long as inherited amount is below a fixed amount which in this case is below the threshold in both federal and NJ state taxes. In past years sale of a house fell under capital gains. Money would have to be reinvested in a dwelling of equal or greater value. I was to believe that this form of capital gain was subject to a one time exemption and later eliminated all together. Most stipulations required the owner to live in the dwelling for more than 3 years.
I did say there were no inheritance tax for federal or NJ.
The federal will want capital gains tax using the fmv as a cost basis on the date of death.
The federal laws changed when they eliminated the inheritance tax. Now, the property you inherit has a cost basis of the fair market value on the date of death. The executor has the opportunity to use an altenrative method for determining the FMV. THis is why I direcdted you to the Estate Tax return. The FMV that you must use in determing any capital gain is what appears on the estate tax return.
In order to avoid any capital gains at all, you have to live in and own the home for two out of the past 5 years from the date you inherited it. If this were the case, you would be able to exlcude 250,000 of captal gain form taxes filing single or maried seperate returns, or 500,000 filing a joint return.
The federal does not have a fixed amount threshold. There is simply no inheritance tax by the fed.
Also with respect to NJ, there is no threshold for children inheriting property from parents. Read this quote: "If a decedent's death occurs on or after July 1, 1988, property passing to a decedent's surviving parents, grandparents, children, stepchildren or grandchildren is entirely exempt from the tax." (downloaded on 09/28/2006 from http://www.state.nj.us/treasury/taxation/index.html?ot7.htm~mainFrame)
The exchange of property and the roll over of gains for a residential property was eliminiated for the Rules I stated above. (Maximum Capital gains Exclusion)
Since this is a residential property that was not used for investment purposes, it is not eligible for section 1031, like kind exchange.
The postponed gain was an old rule that is no longer in effect.
REFERENCE: IRS Publication http://www.irs.gov/pub/irs-pdf/p523.pdf#search=%22IRS%20publication%20523%22