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Ask the Expert: What are the rules for a person selling inherited house?

I inherited my house about a decade ago. I'm a single taxpayer. If I sold my house now, when calculating the capital-gains tax, would the cost be the original price my parents paid for it, or its approximate value when I inherited it?

When you inherit an asset like a house, a stock portfolio or a diamond necklace, your cost for tax purposes is its market value at the time of the deceased owner's death.

Your cost when you sell your house will be its market value at the time of the last surviving owner's death, plus any capital improvements you've made since then. If the house was worth $300,000 when you inherited it, for example, and you've since invested $8,500 in a new roof and $5,000 for a new boiler, your cost would add up to $313,500. Let's say you sell the house for $425,000, netting $419,000 after brokerage and legal fees. Your capital gain is the $419,000 net sale proceeds minus the $313,500 cost and improvements: $105,500.

If you've owned and lived in the house for two of the five years before you sell it, it qualifies as your primary residence. As an individual taxpayer, you're entitled to a tax exemption on the first $250,000 of profit on the sale of your primary residence — so your $105,500 profit in my example would be tax-free.

If you receive an asset as a gift during the donor's lifetime rather than as an inheritance, however, your cost for tax purposes is what the donor originally paid for it.

One caveat: None of the above applies to tax-deferred retirement accounts, which are subject to their own tax rules!

The bottom line

In general, assets are inherited at their market value at the time of the deceased owner's death.

More information

nwsdy.li/IRSinheritedproperty

https://nwsdy.li/IRSrmds

TO ASK THE EXPERT Send questions to act2@newsday.com. Include your name, address and phone numbers. Questions can be answered only in this column. Advice is offered as general guidance. Check with your own consultants for your specific needs.

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