Taxes When You Sell Your Home
From Tax Guide.
Tax Guide · Arab, Alabama
Inheritance and Taxes: Houses, Accounts and IRAs
An inheritance is usually not income to the person who receives it, but a stepped-up basis, inherited IRAs and later sales can still affect your taxes.
The short answer
Do I pay income tax on an inheritance?
Generally not: money or property you inherit is usually not counted as income on your own federal return, but what happens afterward can be taxable.
The word inheritance covers very different things. Cash from a bank account, a house, stocks and an IRA are each treated in their own way. Some come with a new tax basis, some come with income that has not been taxed yet, and some come with the requirement to take money out over time.
There is also the matter of the estate itself, which may have its own return and its own filing. That is handled by the person in charge of the estate, and an attorney may be involved for the legal side, which our office does not provide. This guide focuses on what you may face on your own return.
Basis
What is a stepped-up basis?
A stepped-up basis means that inherited property is generally valued for tax purposes at its worth on the date of the previous owner's death, not at what that person originally paid.
Basis is the number used to work out gain when you sell. Suppose a parent bought a house long ago for far less than it is worth now. If you inherit it, your basis is generally its value at death, so a sale soon afterward may produce little or no taxable gain. Without the step-up, the gain would be measured from the original purchase price.
The basis can also step down if the property lost value. Keep the date-of-death appraisal, the estate paperwork and the closing statement from any later sale. The step-up rules depend on the type of property and how it was owned, and rules can change, so we confirm the current ones.
- Get a date-of-death value for the property, such as an appraisal.
- Keep the will, estate records or deed showing how you received it.
- Save records of improvements you made after you inherited.
- Ask us before you sell or retitle the property.
Houses
What if I inherit a house?
Inheriting a house is not a taxable event by itself, and your later choices (selling, living in it or renting it) are what drive the tax result.
If you sell, the gain is usually measured from the stepped-up basis, and inherited property is generally treated as held long term for tax purposes, even if you sell it quickly. If you move in, the home may become your main home over time, which we explain in taxes when you sell your home. If you rent it out, the income and depreciation are covered in rental property income and taxes.
Property taxes, insurance and repairs while the house is empty can still be costs, and whether they are deductible depends on how the house is used.
Retirement accounts
How are inherited IRAs and 401(k)s taxed?
Inherited retirement accounts are different: they do not get a stepped-up basis, and the money you take out is often taxable income to you.
The tax bill was postponed for the original owner, and it generally passes to the person who inherits. Most beneficiaries must take the money out within a time set by the rules, and some must take yearly withdrawals. Who you are (a spouse, a child, a trust) changes the rules a lot, and they have changed in recent years, so please check before you take or skip a withdrawal.
A withdrawal from an inherited Roth account may follow different rules. Alabama can tax IRA and 401(k) withdrawals, as we explain in retirement income and Alabama taxes.
| What you inherit | Basis | Usual tax result |
|---|---|---|
| Cash in a bank account | Face value | Generally not income to you |
| House or land | Usually value at date of death | Gain, if any, measured from that value on sale |
| Stocks and similar investments | Usually value at date of death | Gain or loss measured from that value on sale |
| Traditional IRA or 401(k) | No step-up | Withdrawals are often taxable income |
General patterns. Details depend on the asset, the owner and your relationship.
Estate and inheritance tax
Does Alabama have an inheritance tax?
Alabama has its own rules for taxes on estates and transfers, and we check how they apply rather than guess.
Federal estate tax applies only to very large estates, and the IRS sets the threshold. Many families never come near it. Still, it is worth asking whether an estate return is needed, especially when the estate is large or holds a business.
A final income tax return may be due for the person who died, and it may be needed for earlier years too if returns were never filed. Our guide to unfiled tax returns can help if returns are missing. Marital status and dependent claims for the year of death are also a common question; read marriage, divorce and your taxes for background.
How we can help
Need help with the tax side of an inheritance?
Our office prepares income tax returns and can review the paperwork from an inheritance, work out basis with you and prepare your federal and Alabama returns.
We are not attorneys and do not give legal advice, so questions about a will or probate should go to a lawyer. Please do not send Social Security numbers or documents through the website; bring them to our office or call us at 256-586-4635.
We serve Arab and the surrounding area. You can also contact us with questions before you come in.
Answers
Questions about inheritance taxes
Is an inheritance taxable income?
Generally not to the person who receives it. Later events, such as selling property or withdrawing from an inherited IRA, can create taxable income.
What is the basis of inherited property?
It is generally the value of the property on the date of the previous owner's death, though rules depend on the asset and how it was owned.
Do I owe tax when I sell an inherited house?
You owe tax only on gain above your basis. With a stepped-up basis, a sale soon after inheriting often produces little gain, but you should keep the appraisal and closing records.
Are inherited IRA withdrawals taxable?
Often yes, because the account was not taxed before. The timing rules depend on who you are relative to the owner, so check before taking or skipping a withdrawal.
Do I need to file anything if a relative died?
A final income tax return for the person who died may be needed, and an estate may have its own filing. The person handling the estate usually takes the lead, and we can help with the income tax side.
Does Alabama tax an inheritance?
Alabama has its own rules, and we check how they apply. An inheritance is generally not treated as income to the person who receives it.
Read next
Related reading
Rental Property Income and Taxes
From Tax Guide.
Is Retirement Income Taxed in Alabama?
From Tax Guide.
Income Tax Services
A service Melton Tax Services provides.
Melton Tax Services
Questions about your taxes or your business?
Our team in Arab is just a phone call away, and we are glad to talk it through with you.