There are multiple types of taxes that can affect the value of an estate and the inheritance that beneficiaries or heirs receive. Especially large estates could be subject to estate taxes if the decedent didn’t plan in advance to minimize that liability.
The deceased individual and the estate could potentially owe income taxes. The beneficiaries or heirs who inherit properties from the estate may also have a responsibility to pay capital gains taxes. Capital gains taxes are a federal tax imposed on the revenue generated after the sale of an asset that has appreciated in value.
Capital gains taxes may apply when people sell businesses, real property, high-value collectibles or investment holdings. When do the beneficiaries or heirs receiving property from an estate need to address capital gains taxes?
There are some exemptions available
Depending on the circumstance, beneficiaries may not actually owe capital gains taxes. For example, perhaps the primary beneficiary of an estate is the surviving spouse of the decedent.
They may no longer be able to afford or maintain the home where they lived while they were married and may choose to sell the home. In such cases, they are eligible for an exemption of up to $250,000 in appreciated equity before they owe capital gains taxes.
The relationship between the beneficiary and the nature of the assets liquidated, as well as the overall value of those resources, how long the new owner holds them and how much they have appreciated in value since their acquisition, can influence the tax rate that applies and the total amount of capital gains taxes due.
Capital gains tax rates can range from as low as 0% for long-term investments in some cases to as high as 37% when selling an asset held for a year or less. Those concerned about capital gains taxes may need support while they plan their estates or assist with estate administration.
Personal representatives, beneficiaries, heirs and even testators creating their estate plans may need guidance to minimize capital gains taxes while simultaneously fulfilling federal tax obligations. Revealing the resources intended as an inheritance and the plan to sell them with an attorney familiar with estate administration and taxes can be helpful for anyone with an interest in an estate.