Do You Have to Pay Taxes on Land You Sell That You Inherited?

Selling inherited land can have significant tax implications, so it is important for individuals to understand their obligations. The sale of such property often involves capital gains taxes, calculated by the difference between the selling price and the property’s basis.

Step-Up in Basis

The step-up in basis is a critical concept when dealing with inherited property, such as land. This tax provision allows the property’s basis to be adjusted to its fair market value at the time of the decedent’s death. For instance, if a piece of land was originally purchased for $100,000 but is valued at $300,000 at the time of inheritance, the new basis for the heir becomes $300,000. Selling the land for $350,000 would result in a taxable gain of $50,000, not $250,000.

This adjustment, codified under the Internal Revenue Code Section 1014, can significantly reduce capital gains taxes. Heirs should obtain a proper valuation of the property at the time of inheritance to ensure accuracy. A professional appraiser can provide a documented fair market value for this purpose.

Calculating Capital Gains

To calculate capital gains from the sale of inherited land, subtract the adjusted basis—typically the fair market value at the time of inheritance—from the sale price. Inherited properties are treated as long-term holdings regardless of the actual holding period, which is beneficial since long-term capital gains are taxed at lower rates. As of 2024, these rates range from 0% to 20%, depending on income.

Additional costs associated with the sale, such as improvements or selling expenses, can further reduce capital gains. For example, significant improvements made to the land can be added to the basis, decreasing the taxable gain. Similarly, selling expenses like real estate commissions or legal fees can be deducted from the sale price.

Reporting Requirements

Reporting the sale of inherited land involves understanding federal and potentially state tax obligations. The IRS requires taxpayers to report capital gains or losses from such sales on their annual tax returns. This is done using Form 8949, which details the sale price, date of sale, and adjusted basis. The information is then summarized on Schedule D of Form 1040.

State tax obligations vary widely. Some states impose their own capital gains taxes, which may differ from federal rates. For example, California taxes capital gains as ordinary income, often resulting in higher rates than federal long-term capital gains taxes.

Maintaining thorough documentation is essential. Taxpayers should keep records such as the original appraisal, sales contract, and receipts for improvements or selling expenses. Retaining these documents for at least seven years aligns with the IRS’s statute of limitations for audits involving substantial errors.

Deductions and Exemptions

Deductions and exemptions can influence the financial outcome of selling inherited land. While the federal estate tax exemption primarily applies to estates exceeding $12.92 million as of 2023, state-level estate or inheritance taxes may still apply.

Deductions related to the property’s sale can offer financial relief. If the land was used for income-producing activities before the sale, maintenance or operational expenses like property taxes, mortgage interest, or certain conservation costs may be deductible. Consulting tax professionals can help identify deductions applicable to each unique situation.