Will Capital Gains Taxes Apply to Inheritances?

Upon your death, there may be some federal estate taxes that apply to your assets. Estate taxes only affect a fraction of estates, as the threshold for federal estate taxes is quite high. But you might be wondering whether your loved one’s inheritance could be subject to a capital gains tax as well.

Here’s a quick look at what you should know.

About the capital gains tax for estates

Capital gains taxes are applied to the growth in value of investments incurred when individuals transfer those investments. If the asset is sold for less than its original value, there would be a capital loss, which results in no taxes as to that specific asset. While if the asset is sold for more than its original value, the net gain is taxable.

Capital gains taxes can apply to inheritances as well. When someone sells an inherited asset, long-term capital gains tax will be due on the difference between the sales price and the tax basis. The higher the basis, the smaller the difference between it and the sales price. The tax basis is based on the value of the assets at the time of your death, rather than at the time you purchased those assets.

Say, for example, you purchased a house for $100,000 that is now valued at $200,000. If you die when the property is worth $200,000 and your heirs sell it for $220,000, the capital gain would only be $20,000 rather than $120,000. This significantly reduces the potential impact of capital gains taxes on beneficiaries’ inheritances.

To learn more about how the capital gains tax could apply for your estate assets, contact an experienced Tampa, FL estate planning lawyer at BaumannKangas Estate Law.