Receiving an inheritance can be both emotionally and financially significant. Whether you inherit real estate or investments, understanding the tax implications and your options is essential.
Inheriting Real Estate
Many individuals inherit a home or other real estate from a loved one. Before deciding whether to keep, rent, or sell the property, consider the following:
Understand the “Step-Up in Basis”
One of the most important tax benefits available to inheritors is the step-up in cost basis. In many cases, the property’s value is adjusted to its fair market value on the date of the original owner’s death.
For example, if your parents purchased a home for $150,000 and it was worth $500,000 when inherited, your new cost basis may become $500,000. If you later sell the home for $510,000, you may only owe capital gains taxes on the $10,000 increase in value rather than on the entire gain.
Evaluate Your Options
After inheriting real estate, you generally have several choices:
- Keep the property as a primary or vacation home.
- Rent the property to generate income.
- Sell the property if maintaining it no longer fits your financial goals.
Each option carries different tax, maintenance, and cash flow considerations.
Consider Ongoing Expenses
Owning inherited property often comes with ongoing costs, including:
- Property taxes
- Insurance premiums
- Maintenance and repairs
- Utilities and sometimes association fees
Before deciding to keep the property, make sure these expenses fit comfortably within your overall financial plan.
Inheriting Stocks or Other Investments
Investment accounts can also create unique opportunities for beneficiaries.
Review the Cost Basis
Similar to real estate, inherited stocks often receive a step-up in basis. This means the cost basis is generally adjusted to the market value on the date of death.
For example, if a stock was originally purchased for $20,000 and was worth $75,000 when inherited, your taxable gain would typically be based on the value at inheritance rather than the original purchase price.
Understand the Type(s) of Accounts
The rules differ depending on the type of account inherited:
- Taxable brokerage accounts generally receive a step-up in basis.
- Traditional IRA or retirement accounts may require distributions and could create taxable income.
- Roth IRAs may have different distribution requirements but often provide tax advantages.
Understanding the account type is important before taking distributions or making investment changes.
Working with a financial advisor, tax professional, and estate attorney can help ensure inherited assets are integrated into your overall financial plan in a tax-efficient manner.
Equitable Advisors and its affiliates and associates do not provide tax or legal advice or services. Please consult with your tax and/or legal advisors with regard to your particular circumstances.
Final Thoughts
Inheriting real estate or stocks can provide meaningful financial opportunities, but important decisions should not be rushed. Taking the time to understand tax implications and evaluating your options will make the most of your inheritance.
If you’ve recently inherited assets or expect to in the future, we’re here to help you navigate the process and make informed financial decisions.