Although there is a limit as to how much of a loss you can claim each year, in general, selling inherited property at a loss counts as a capital loss on Line 13 of your annual 1040.
Heirs in Massachusetts and New Hampshire sell inherited property at a loss more often than you may think. Many times, a financial loss is an emotional gain. Especially if the death was a particularly difficult one, some heirs want to move on quickly. Making repairs to the house and then waiting for it to sell may not be the best option. As outlined below, a quick, as-is cash sale usually fetches a reasonable price. And, the heirs are free from the burden of owning a house they really do not want.
There are other situations as well. For example, if the inherited property has multiple owners, a sale is usually better than a fight.
Additionally, the 2017 tax code changes have some effect on inherited property sales in Massachusetts and New Hampshire. There are some longstanding laws that bear looking at as well. In a nutshell, it may be possible to sell inherited property for a financial gain and still claim a loss on Schedule D. Or, at the very least, the capital gains tax hit may be greatly minimized.
Inherited Property and The Land of OZ
The 2017 tax code changes created Opportunity Zones. Each state may designate certain neighborhoods as economically distressed. If a person invests in these areas, the IRS allows a temporary deferral of capital gains taxes. So, you do not pay a bigger tax bill in addition to the other expenses associated with a death in the family. Moreover, these taxpayers may be eligible for a 15% basis reduction.
Now for the really good part. Inherited property owners may pay zero capital gains tax if they own the property for at least 10 years and then sell it. As outlined below, that kind of arrangement is rather common in these situations.
When the federal government created Opportunity Zones, it basically intended for the states to designate very low-income areas as OZs. But that is not necessarily the case. About a fifth of the designated neighborhoods have relatively low poverty rates and/or are in the process of gentrification. So, even if your inherited property is not “on the wrong side of the tracks,” it may still be in an OZ.
Inherited Property and Capital Gains Basis
If your inherited property is not in an Opportunity Zone at the moment, don’t worry. States can re-designate OZ neighborhoods every 10 years.
The basis rule is different in this area. Assume that you inherit your parent’s house. They bought it back in the day for $100,000. Over the years, they made $10,000 worth of improvements, bringing the basis to $120,000. Before deciding whether or not to sell, you have the house appraised. The appraiser says it is worth $500,000. Therefore, you brace yourself for an extremely large tax bill. On the surface, you may be looking at a minimum $380,000 capital gain.
But not so fast. You get a significant tax break. If you sell the house, the basis is $500,000, or the fair market value at the time you inherited the property. If the house sells for $505,000, you only pay capital gains tax on $5,000. If you sell the property at a loss, you can only claim a maximum $3,000 in the year of sale. Any other loss must be deferred to future years.
There are a lot of nuances involved, so you really need to speak to a CPA or tax attorney to better estimate your tax liability. (If you need a referral to one, I can help.) But, that’s essentially how it works.
Some Options for Disposing of Inherited Property
The zero capital gains tax for a 10-year OZ property may seem like an impossibility. But once again, these situations are rather common in Massachusetts and New Hampshire. Frequently, a relative moves in with an aging homeowner to serve as a caregiver. When the homeowner dies, a provision in the will often allows the caregiver to remain in the house rent-free in consideration for services rendered. Even if there is no such provision, some people think it is rather cruel to dispossess the caregiver.
In other situations, the heirs cannot decide what to do with the house straightaway. Perhaps some heirs want to sell, and some want to keep the house in the family. Renting the house is usually a good option in these circumstances. The house stays in the family, the house produces income, and someone gets to live there. Everyone wins.
Sooner or later, however, almost all inherited property in Massachusetts and New Hampshire is sold. When that day comes, there are several options:
- Realtor Sale: This method is almost entirely trouble-free because the realtor handles the marketing, showing, and pretty much everything else. Realtors also know how to get maximum financial value for a house. Of course, this expertise is not free. And years of clutter and neglected repairs will need to be addressed before a showing can occur. Furthermore, depending on market conditions, the house could be on the market for several months or even longer.
- Owner Sale: Selling the house yourself could save thousands of dollars in commissions. The downside is that you must do everything yourself. That’s a headache for everyone, but especially those who are not local and/or have busy lives. Sometimes, the savings are not worth it.
- Auction Sale: Some people sell inherited property at live auctions. Other people use online auctions or even a site like eBay. The only financial investment is the auction fee. The competitive bidding usually drives the price up, and there is no need to empty the house. If you don’t want what is in there, just leave it and let the new owner deal with it.
- As-Is Cash Sale: Much like an auction sale, an as-is cash sale requires no inspection. Closing is usually rather fast as well. Many cash buyers close on a property within a week or two of the cash offer. The sales price will probably be lower. But as mentioned above, money isn’t everything when it comes to inherited property because you won’t have to make repairs or remove all the unwanted possessions from the property.
There are a lot of factors to consider when selling inherited property. Be sure you take all of them into account. Also, be sure you are intimately familiar with the nuances in the tax and other laws. At Inherited Property Solutions, we focus exclusively on these kinds of properties. So, we are well-positioned to walk you through the entire process. Contact us today and let us help you.