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Megan C
Megan C, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 16576
Experience:  Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
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My husbands parents inherited a house 10 years ago, and we

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My husband's parents inherited a house 10 years ago, and we have been living in it since. They plan to give us the house this month via a quit-claim deed, and we plan to sell it within a few months. The money will go to pay off a house we are buying. When his parents inherited the house, they paid income tax on $90K. His grandparent bought the house in 1964 for $35K. How much federal tax will we owe from the sale of the house? Thanks.

Megan C :

Thank you for your question. My name is XXXXX XXXXX I will be happy to assist you today

Megan C :

I'm confused a little because you said that your in laws paid income tax on the inheritance of a house, because you never pay income tax when you inherit a property

Megan C :

You only pay income tax when you sell the inherited property (and then, it's capital gains).

Customer:

Hmm.... I don't know about that either.

Megan C :

But, your basis is equal to their basis. Their basis is the fair market value on the date of death of the person they inherited the property from.

Megan C :

So, based on your question, it would be the fair market value 10 years ago when the house was inherited.

Customer:

OK. I think that answers my question, then.

Megan C :

Your gains would be the amount by which the sales price exceeds that basis

Customer:

So even though they only paid $36K for it, the basis would be $90k?

Customer:

And we'd pay capital gains on the difference between what we get for the house and 90K?

Megan C :

They didn't pay $36,000 for it, the grand parents did-right, and then when the grandparents died, that's when they acquired the home?

Megan C :

They did not acquire the home while the grandparents were living

Customer:

that is correct.

Megan C :

Okay then, that is correct. Even though the house was purchased for $35K, the basis is based on the fair market value at death

Megan C :

It's called a "stepped up basis"

Customer:

Oh - my in-laws payed inheritance tax I just found out.

Customer:

Not income tax.

Megan C :

It must not be a federal tax.

Megan C :

What state are you in?

Customer:

OK. So what do we need in order to prove the value at the time of inheritance?

Customer:

Texas

Megan C :

When the parents paid an inheritance tax, it was based on something - the fair market value of the property

Megan C :

If they have proof that's what they paid tax on, there's your proof of value

Customer:

My in-laws are flaky, so there is no telling what the actual tax was called.

Customer:

Sweet - thank you! So to pay the $30, how do I do that?

Megan C :

You rate my response as positive (3-5 smileys) and that processes payment

Customer:

OK. Have a good evening!

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