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Inherit Real Estate; What You Need to Know Regarding Taxes

by Marc Cormier

How to Pay the Least Amount of Taxes on Inherited Real Estate

It is always difficult to focus on financial affairs at the loss of a loved one, but it is important to understand how taxes can affect real estate. When someone dies, the State can put a tax on that person’s assets before distributing them to the heirs or beneficiaries. Taxes can also be assessed on real estate, which is a potential problem for loved ones who are counting on continuing to live in the home. How the taxes are assessed depends on several factors. Depending on where the decedent resided, an heir can inherit a big tax bill along with a home. An enormous tax bill could threaten the financial stability of heirs, especially those like spouses who were financially dependent on the person who died. Even if the heir does not intend to live on the property, there are ways to reduce the tax burden.

How the State Decides Tax Value on Real Estate

Normally, the stepped-up value of a property is considered for the basis of inheritance tax purposes. The stepped-up value is the current market value, as opposed to the price originally paid for the property. If the decedent owned the property for a long time, the value of the property may have increased quite a bit. Property can also increase in value when there are improvements or when the composition of the neighborhood changes.

The heirs of a property receive a step-up in the basis of the value on the date of death, which is a tax perk but also simplifies matters for those who have no way of knowing the original value of the home. Because of all these different scenarios, it is important to understand the different ways a home’s value can change and how that value is assessed. A professional who works with real estate, like an estate attorney or a real estate agent, can help you with most of those questions.

The Use of a Home

One of the most important factors when deciding how a piece of real estate is taxed is how the property was used. Was it a primary residence? Was it shared with another owner? Did the owner rent it out for all or just some of the term of ownership?

Most jurisdictions offer tax breaks for individuals who are using property as a primary residence, but the specific rules are different depending on where the property is located.

Different States, Different Probate Rules

All probate cases in Virginia go through the Circuit Courts, but Virginia does not have a separate estate tax. Maryland is one of only two states that collects both an inheritance tax and an estate tax. DC has an even more confusing system because you will need to find out if you are subject to the DC estate tax or the federal estate tax.

As a layperson, it can be difficult to know which rules apply to your situation. There are rules and regulations to cover almost every eventuality. The best way to make sure you’re not losing money unnecessarily is to work with a professional who understands real estate.

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