Many people in California and beyond find inheriting property overwhelming, especially if they are not currently homeowners or have little experience owning and maintaining a home. You most likely inherited this property due to a family death or a family property transfer. Whether you are excited about receiving this property or not, you will need to decide what to do with it.
Owning a second property can benefit many families looking to build equity. Still, suppose you aren’t prepared to deal with all of the tax liabilities and responsibilities that come with it. In that case, you’ll have to implement an exit strategy, whether it’s selling as quickly as possible or avoiding taxes in any other way.
When you inherit property from a deceased loved one, you are responsible for all tax liabilities associated with the inherited property, including federal estate tax and capital gains tax and all outstanding debts, such as a mortgage.
Furthermore, a Bay area home buyer knows that inheriting real estate entails several non-legal but equally essential responsibilities, such as deciding whether to sell the property, make it your primary residence, or turn it into a rental property to help offset expenses and even profit.
This post aims to take you through some critical things to keep in mind while you are inheriting property in California. Read along to learn more.
What is the definition of an Inheritance Tax?
An inheritance tax is a tax levied on individuals who own property in the state where they died, also known as an estate tax, or who inherit property from a resident of that state, also known as an inheritance tax. California has no inheritance tax. If you inherit money, you will not have to pay taxes. Your inheritance money will not be considered income.
Capital Gains Taxes May Be Due
Even if there is no federal inheritance tax, the IRS will still investigate any capital gains taxes. Assume you inherited a ranch worth over $2 million from your father. When you inherit the property, you will not be required to pay an inheritance tax. However, if you decide to sell the ranch within ten years, you will be required to pay capital gains taxes on the income generated by the sale of the property.
Federal Estate Taxation
California does not have an estate tax, but the federal government does. After a person dies, the only tax imposed on their California state is the federal estate tax. If you owned property in another state with a state-level estate tax, your estate might have to pay federal and state-level taxes. Estate taxes are only required for estates worth a certain amount of money.
When a California resident dies with an estate worth less than the exemption amount, their estate is exempt from federal estate taxes. There is no inheritance tax in California. In other words, the beneficiaries and heirs will be able to inherit the property tax-free. They will also not have to pay income tax on the property because the inherited property is not considered ordinary income. Retirement accounts are the only exception to this general rule. When a person inherits a retirement account, they must pay income taxes on the assets withdrawn from the account.
Can You Sell Inherited Property?
Have you inherited your parents’ home after their death? You might be wondering what kind of taxes you’ll have to pay if you sell their property. You will be required to pay capital gains taxes on the property’s value when your parents die.
When you inherit a home, even if it is now worth 20 times what it was when your parents bought it, you are not required to pay a tax on the real difference in value. The IRS will not consider the amount your parents originally paid for the house. Instead, they will consider the value of the house at the time you inherited it.
What if I inherited property from someone who is not a California resident?
What if you are a California resident and inherit property or assets from someone who lives in another state? Assume you live in California and received an inheritance from a great-uncle who lived in Maryland. There is an inheritance tax in Maryland. A small inheritance may be exempt from inheritance taxation in some states. For instance, if you only inherited $10,000, you may be exempt from paying taxes. Furthermore, if you are married to the deceased, you will not be required to pay an inheritance tax. If none of these exceptions apply, you must pay an inheritance tax.