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What Taxes Are on an Inherited House?

by Fraser Sherman, Demand Media

Inheriting a house can cost the heirs money. Heirs may have to pay a variety of state and federal taxes, which may be
due immediately or if they sell the property later. The government exempts some property from taxes and offers ways
to reduce taxes, depending on the heir's circumstances. In some cases, owners who inherit property and later sell it
may be able to claim a tax loss.

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Estate Taxes

Although the federal government suspended the estate tax for 2010, it's scheduled to return in 2011 for estates worth
over $1 million. Taxes on estates worth that much--including real estate, stocks and bank accounts--will be paid by the
estate, rather than the heirs. Several states levy estate taxes of their own, though others, such as California, do not.
W he n som e one passe s on a
house , tax e s m ay have to be
Inheritance Taxes paid.

Heirs pay federal inheritance tax on the net worth of their inheritance. The net worth is the gross value less certain deductions--a mortgage that must be
paid off on an inherited house, for instance, or a marital deduction for property inherited by a spouse. If the result is more than the IRS exempt amount
for a given year--$1.45 million in 2009, for example--the heir must pay an inheritance tax at the federal income-tax rate for the non-exempt amount.

Property Taxes

Heirs may have to pay property taxes as soon as they inherit real estate, and they'll continue to pay them for as long as they own the house. Many states
cap how much the assessed property value can rise from year to year, but when someone buys or inherits real estate, it will be reassessed at current
market value. Even if subsequent assessments are capped, the initial reassessment can result in heirs paying thousands of dollars more in taxes than the
previous owner. Some states offer an exemption. California state law, for instance, says that if the heir is the spouse or child of the owner, there's no
reassessment.

Capital Gains Taxes

When an heir sells an inherited house, he has to pay capital gains tax on the profits. The usual process for calculating capital gains is to subtract the
market value of the home at the time it was inherited from the sale value. The heir can subtract costs such as the agent's commission from the sale
amount; if the adjusted amount is less than the house was worth when it was inherited, the heir may be able to claim a tax loss.

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References
Bankrate: Selling an Inherited Home(http://www.bankrate.com/brm/itax/tax_adviser/20070830_inherited_home_sale_a1.asp)
California: Property-Tax Assessment Caps(http://www.leginfo.ca.gov/.const/.article_13A)
Money Zine: Inheritance Tax(http://www.money-zine.com/Financial-Planning/Tax-Shelter/Federal-Inheritance-Tax/)
MSN Money Central: Estate Tax(http://articles.moneycentral.msn.com/RetirementandWills/PlanYourEstate/TheDeathTaxIsFarFromDead.aspx)

Resources
University of Maryland: Estate Planning--Taxes and Insurance(http://militaryfinance.umuc.edu/estate/estateplan_taxes.html)
IRS: Estate Taxes FAQ(http://www.irs.gov/businesses/small/article/0,,id=108143,00.html#2)

About the Author

Fraser Sherman is a former reporter with the "Destin Log" newspaper and now freelances full-time. His work has been published in
"Newsweek," "Air & Space," "Backpacker" and "Boys' Life," and he's the author of three film reference books, including "Screen Enemies of
the American Way." He specializes in finance and tech articles.

Photo Credits
cemetary 3 image by sonya etchison from Fotolia.com

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