When you inherit a home, you’re inheriting not only your loved one’s legacy but also additional financial responsibilities. Between the mortgage, property insurance, utilities, property taxes, repairs, and general yard maintenance, owning a home is an expensive endeavor. Double that and you now have the stress many experience when they own one home and inherit another.
Fortunately, as an heir in this position, there are still ways you can save money, no matter if you wish to keep the home or sell it. Surprisingly, all of these involve beneficial tax deductions.
In this article, we’ll share what those are and whether you’ll be eligible, so that in the long run you’re able to reduce the cost of inheriting a home.
Property taxes are typically one of the largest expenses associated with owning a home. The good news is no matter if you decide to move into an inherited home or keep it as a rental, so long as you itemize your deductions, you’ll be able to deduct the property taxes.
There is, however, a cap on the amount you can receive in property tax deductions, which is $10,000 per year. This is true even if your property taxes exceed that amount.
Furthermore, tax deductions for real estate property taxes can only be taken by the person who is on title. So, if the property you inherit has delinquent property taxes, even if you paid these, you won’t be able to deduct them on your own returns because those taxes pre-dated your ownership.
For example, let’s say you inherit a home with $15,000 in back taxes owed. You decide to keep it as a rental and pay the taxes. Then you get a new tax bill in your name for $17,000. Even if you pay it, you’ll only be able to write-off $10,000 at most. This is because the back taxes owed could only be written off by your loved one, and the $7,000 of your new bill is ineligible for the deduction.
In the event you decide to sell the property, you may consider doing so at a loss in order to avoid paying any capital gains taxes and write it off. In general, this is allowed, so long as you have never occupied it personally.
The amount of your loss that you will be able to deduct, however, will only be limited to the difference between the price you sell it for and the fair market value of the home when you inherited it.
For instance, let’s imagine you inherited a home that was originally purchased for $500,000 in the height of the real estate bubble, but the day you inherited it was worth $400,000. If you eventually sell it for $300,000, you are only eligible to deduct $100,000 as a loss and not $200,000.
Typically, you can deduct a loss on the sale of a second home. However, if at any point you did occupy the home as your personal property, even if you reverted it back to a second home, the total loss that you can deduct is affected.
This is because the IRS wants to make sure that any loss in value that you experienced while occupying the home as your personal residence is not written off.
For instance, let's assume you inherit a $200,000 home. After living in it for several years, the market tanks and the value of the home drops to $150,000. At that point, you decide to move out, and then a year later sell it for $125,000. Even though you sold it for $75,000 less than the value of the home when you first inherited it, you're only able to deduct the loss covering the timespan it was not your personal residence, which would be the difference between $150,000 and $125,000, or $25,000.
An alternative, and better way, to maximize your tax deductions when offloading a property can be to donate it to charity.
By donating property to a nonprofit, you can deduct the fair market value of the home as a tax loss. Using the illustration above, if you were to donate the property instead of selling, you’d be eligible to deduct $150,000 as a loss because that was the new fair market value of the home.
While you are limited to using only a specific percentage of this amount each year depending on your income and filing status, it can bring you far more cost savings than deducting property taxes each year ever could. Furthermore, writing off $150,000 over the next five years, versus just $25,000 if you had sold the home at a loss, is a big difference.
In many cases donating inherited property to charity versus selling it is a decision that separates heirs who are financially burdened when inheriting property from those who are uplifted by the gift that has been passed to them.
A Florida attorney charged with executing a client’s will found refuge in taking this approach. His client had left a restaurant, storage units, and several commercial stores behind- all of which were draining the estate of cash each month to keep up with ongoing expenses, utility bills, and other costs.
Acting quickly, he contacted Giving Property to arrange for the sale of the property, and by working closely with the current property manager we were able to list the property and get it sold for $660,000 for the benefit of the Disabled American Veterans (DAV) Charitable Service Trust.
By donating the property’s sales proceeds to charity, the estate was able to provide its beneficiary the greatest tax relief and at the same time feel honored to transform his legacy into helping those who bravely fought for our country.
To learn more about donating your own home or other real estate to a charity of your choice, while maximizing the tax benefits to you, contact us at 844-277-HOME or fill out our form https://givingproperty.org/contact-us.