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Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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Is there Inheritance Tax in NY?

Customer Question

I was told that there is no Inheritance Tax in NY but we have to pay Capital Gains. I would like to find out how many percent we have to pay on Capital Gains from the house that we inherited from our grandmother?

Submitted: 6 years ago.
Category: Tax
Expert:  Merlo replied 6 years ago.

Can you please tell me what year your grandmother passed away?

What was the value of her entire estate at the time of her death?

Is your grandmother's home located in NY?

Customer: replied 6 years ago.

Grandma passed away last year in October and she lived in East Meadow in Long Island.

There is no estate it's only the house that she and may grandpa lived for many years so I don't know how much is the value of her property.

We sold it for $385,000.00 and we had a closing yesterday and the attorney said that we have to pay 22% Capital Gains, so we are all shocked!

Expert:  Merlo replied 6 years ago.

Your attorney is correct that you would pay approximately 22% in capital gains tax (15% federal and 6.85% for state of NY) -- BUT that will not apply to the entire purchase price, and may not even apply at all unless you had a gain from the sale.

Since your grandmother passed away in 2009, you are entitled to a full stepped up basis in the property. What that means is that your basis becomes whatever the fair market value was of the property on the day your grandmother passed away. If you later sell that property for more than your stepped up basis, you pay taxes only on that excess amount.

Often when a property is sold within a short period of time after it is inherited the sale price ends up being the same as what the value was on the day you inherited it. When that is the case, there is no gain and no tax is due. So the only way you would owe any tax on this sale is if the property was worth less than $385,000 on the day you inherited it. Let's just say the property was worth $370,000 when your grandmother passed away. If you now sold it for $385,000 you would have a taxable gain of $15,000 and would owe approximately $3,300 for federal and state taxes. But if the property was worth $385,000 when your grandmother died, then you have no gain and you owe no taxes on this sale.

Customer: replied 6 years ago.

Okay, so in that case if the price of the property is the same we don't have to pay any Capital Gain Tax, but what confuses us was the deed was transferred to me and my siblings in 2006 do we have to pay Capital Gain from the date the deed was transferred to our name?

Expert:  Merlo replied 6 years ago.

Unfortunately, that changes the entire answer that I gave to you, and also has a great impact on the tax you will owe.

If your grandmother transferred the deed to this property to you prior to her death, then that is considered by the IRS to be a gift. A gift is not the same as an inheritance. When you receive property as a gift, you retain the same basis as the donor. So you would not receive a stepped up basis in this home. Your basis would be whatever your grandmother's basis was, which is basically what she originally paid for the home plus the cost of any improvements she may have made.

Obviously if your grandmother purchased this home years ago at a much lower price, that will end up giving you a much larger gain on which you will owe the same tax rates of 15% federal and 6.85% NY state tax.

In your first post you talked about inheritance which is why I gave you the rules on taxes due on the sale of inherited property. But this in fact was not an inheritance that you received, but instead it was a gift which has totally different rules in determining your basis.

Customer: replied 6 years ago.

I’m sorry, I thought it was the same. Our father said at the time it was transferred to our name it was on the basis of lifetime estate so we don't have to pay taxes on it once our grandmother passed away.

Expert:  Merlo replied 6 years ago.

Life estates are yet another entirely different issue.