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Merlo, Accountant
Category: Tax
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Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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my wife inherited her fathers home. The house was appraised

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my wife inherited her fathers home. The house was appraised for $110,000 and sold for $92,000. The total received after closing and all was around $82,000. This to be split 3 ways between the siblings. but my wife was the sole inheriter of the actual home.   Now in Ohio you can gift up to 26,000 or something to that effect. My question is come tax time, how do we not get hurt on the sale of this house and the gifting to the siblings. There was some money distributed last year when the father died, and they rushed out and cashed the IRA and retirement without doing research and on our percentage of the money, if became straight income and we were bumped like a few tax brackets higher, and had to pay like 6000 dollars in taxes, ouch. Any help appreciated.
Hello mark,

You actually have a couple of different issues here which need to be addressed or explained.

First, there is no inheritance tax in the US at the federal level. The IRS instead imposes an estate tax on any estate which exceeds a certain value. In 2008 that level was $2 million. So assuming the father's estate was valued below that amount, and he passed way in 2008, then no federal estate taxes would be due.

The state of Ohio also has an estate tax on estates which exceed a certain value, and that value is currently set at $338,333. So again, if his estate was below that value, then no Ohio estate taxes are due.

You mentioned that you had a large tax bill of $6,000 when cashing in an IRA account. An IRA account is a tax deferred account, which means that regular income tax has never been paid on the assets contained in that account. When a beneficiary cashes in an IRA account, those assets immediately become subject to normal income tax, because they were never tax paid to begin with.

But all other assets such as a home or money contained in a regular savings account are all tax paid assets. And no further tax is due unless the entire estate exceeds the values mentioned above.

The home which your wife inherited is not subject to any inheritance tax. And when you inherit property, you automatically receive a stepped up basis in the property, meaning the beneficiary's new basis the fair market value on the day she inherited it. Now even though no tax is due on the value of that property, if you now sell the property for more than your stepped up basis, you would be liable for capital gains tax on any gain you had, if you sold the home for more than your inherited stepped up basis.

In your wife's case, she actually sold the home for less than what the market value was on the day she inherited the home, so she has no gain, and will owe no tax on the sale.

Now if she wants to split that money with her siblings, this can also be done without any tax implications.

Under current law (this applies to all states, not just Ohio), each individual may give lifetime gifts of up to $1 million before any gift tax becomes due. Individuals may also give annual gifts of $13,000 to as many other individuals as they wish without those annual gifts even counting towards the $1 million limit. Gifts which exceed the allowed $13,000 exclusion must be reported, but there is no tax due unless that person has already used up his $1 million allowed lifetime exclusion.

You have indicated that the $82,000 is to be split 3 ways, so I assume that means that your wife plans to keep $27,333 and then give $27,333 to each of two siblings.

The annual exclusion allowed of $13,000 applies to each taxpayer. That means that both you and your wife can give $13,000 to each sibling, or a total of $26,000, without any reporting requirements. You could also give another $13,000 to the sibling's spouse if they are married. There is no limitation on the number of people that you can give $13,000 to in any one year.

And even if you choose just to have your wife give the entire $27,333 to one person, she will still owe no tax, as long as she has not used up her $1 million lifetime exemption. The only difference would be is that by exceeding the $13,000 limit to any one person, she is then required to report the gift by filing Form 709. And the gift that is reported then reduces her $1 millionn allowed exemption amount by the value of the gift given.

The botXXXXX XXXXXne is that you should not owe any taxes on the sale of this home or the splitting of the money, as long as your wife has not already exceeded her $1 million allowed lifetime exclusion on gifts.

If this was helpful please press the Accept button. Positive feedback is also appreciated.

Thank you mark, and let me know if you have more questions.

Customer: replied 8 years ago.
hi, wife here, just one more question. come income tax time, we still need to report this, correct? is it income? or do we just report it as a sale that came up short of the appraised amount? i'm supposed to divey (spelling) up the money tomorrow, and i just don't want us to get slamed again. your answer has made us feel much better, thanks, XXXXX XXXXX will be getting someone to do our taxes next year. my only question is how do we report it on our taxes? my money, and the money that i gifted my siblings and their spouses. is there a place to report it, or do we just do our taxes as if the sale never happened.
Hello again mark,

I need the answer to one more question.

When your wife inherited this property, did it then remain vacant up until the time it was sold, or did anyone actually move in to the home and use it as a residence before it was put up for sale?

Customer: replied 8 years ago.
it was empty. no lived in it after my dad died.
Hello again mark,

When you sell a property, at the end of the year you should receive a 1099-S form from the company that handled the closing. That 1099 from will report the total amount you received from the sale of the home. A copy of that same 1099 form is sent to the IRS, so they will be looking for you to report this transaction on your tax return, even though no tax will be owed.

The reason I asked if the house had been occupied or was vacant is this. When you have loss on the sale of a personal property, then even though you owe no tax, you also are not allowed to deduct the loss. However, in the case of a property that has been inherited, if after the home was inherited it remained vacant, then the IRS allows you to treat this as investment property, which means you can actually deduct the loss you had from the sale. If the fair market value of the home was $110,000 and you only receive $82,000, then you actually have a deductible loss of $28,000.

Now the transaction is treated as a capital loss, and you are limited in the amount of capital losses you can deduct in any one tax year to a net capital loss of $3,000. Capital losses can be used to offset capital income. What that means is that if in the same year you had any capital gains from the sale of stock or other assets, you could offset those gains with this $28,000 loss, up to a net loss of $3,000. Any remaining loss which you cannot use this year can be carried forward and used in each future year, again not to exceed $3,000 in any one year. If you have no capital gains to report next year and you strictly have the $28,000 loss, you will be able to claim $3,000 of that loss and it will reduce your taxable income by that amount. The remaining $25,000 loss is then carried forward each year until completely used.

The sale will be reported on Schedule D as a long term capital loss. You will show the sale proceeds that you received as reported on the 1099-S form and you will show your cost or basis as the inherited value of $110,000. You will then show your loss of $28,000, and will then be able to deduct that each year until it has been entirely used as a deduction.

If this was helpful please press the Accept button. Positive feedback is also appreciated.

Thank you mark.

Merlo and 2 other Tax Specialists are ready to help you
Customer: replied 8 years ago.
thanks for all your help.