My second question is what if I sold my primary residence to pay for my medical expenses? Would I be able to keep the profit tax free if the profit were less than $ 500,000? Is that right? What happens to taxes if my children inherit the main residence? Many Thanks.
A: Given our mail, we can honestly say that there is nothing more confusing to our readers than real estate-related questions related to inheritance and taxes. Except maybe for Quitclaim deeds.
Let’s start with the idea that the Internal Revenue Service expects you, with a few notable exceptions, to pay tax on that profit if you make a profit on the sale of your property. But not all real estate is created equal to the IRS. Main residences and holiday or investment houses are treated differently according to current tax law.
Let’s start selling your primary residence. The federal government grants a huge tax break to homeowners who have lived in their homes for two years in the past five years and have used that home as their primary residence. In this situation, if you sell the home at a profit, you will not have to pay federal taxes as long as the profit is less than $ 250,000 if you are single and $ 500,000 if you are married.
So, if you sell your home and meet the legal requirements, it is unlikely that you will have to pay federal taxes on the home sale. Now we cannot go into all the different requirements and limitations due to space requirements here. However, if you have additional questions, the Internal Revenue Service can provide answers at irs.gov. (Look for publication 523 on Selling Your Home.)
On the other hand, when you sell your vacation home, you will have to pay federal taxes on any profit you make from the sale. If you’ve owned a vacation home or second home for more than a year, corporate income tax is usually taxed at a capital gains tax rate. This rate can be up to 20 percent plus a net capital gains tax of 3.8 percent. You might pay less than that amount, but this should give you a high-end number to think about if you decide to sell the vacation home.
What if you just leave your home for your children after you die?
If you choose to let your children inherit the homes, your children will receive the real estate of your estate at a value determined at or about the time of your death. For example, suppose you bought a house for $ 100,000 and when you die, the house will be worth $ 250,000. Then, if your children sell the house for $ 250,000 shortly after inheriting, they will not pay tax on that sale. For IRS purposes, your children would have bought and sold the houses for the same value so no taxes would have to be paid. This is the tax principle known as the raised base.
However, if your children hold onto the property for a while after you die and later sell it for $ 350,000, they will have to pay tax on the $ 100,000 profit. Given that the IRS usually allows heirs to claim the sale price as home value if the home is sold within a year or so of your death, they do not pay federal tax on profits if the home is sold within that first year but will then pay capital gains taxes on profits if the home was sold after the first year.
Finally, you mentioned in passing that you might have to sell the house to pay the medical expenses. Your decision to sell one of the homes to pay medical bills shouldn’t change what tax you owe the federal government, although doing so may get you a medical expense deduction on your income tax return.
The IRS allows you to deduct medical expenses if that medical expenses exceed 7.5 percent of your gross adjusted income. Note that you currently get a standard deduction of $ 12,550 if you’re single, $ 25,100 if you’re married, and $ 18,880 if you’re the head of household.
In addition to federal taxes owed, state taxes may be owed depending on the size of your estate or the amount of profit on the sale. Your local tax advisor, CPA, or registered agent can help.