Without knowledge of the exact circumstances, an exact total cannot be
computed. However, the general rules by which the tax can be
calculated are as follows.
The sale of the inherited real property resulted in a capital gain,
which is taxable under the Capital Gains Tax, Schedule D, Form 1040.
The capital gain is the amount realized after the sale less the basis,
the assessed or appraised value at the time of inheritance. Thus, in
the given example, the capital gain equals $20,000 (sale price) minus
$8,100 (basis), or $11,900. The basis can be adjusted by adding the
costs of the sale (commissions, transfer tax, etc.). The actual rate
at which the gain will be taxed depends mainly upon the individual tax
rate of the tax payer.
Consulting the relevant IRS publications:
Forms and Publications
http://www.irs.gov/pub/irs-pdf/
Publication 544
Cat. No. 15074K
Sales and Other Dispositions of Assets
http://www.irs.gov/pub/irs-pdf/p544.pdf
"Basis. You must know the basis of your property to determine whether
you have a gain or loss from its sale or other disposition. The basis
is usually its cost. However, if you acquired the property by gift,
inheritance, or in some way other than buying it, you must use a basis
other than its cost. See Basis Other Than Cost in Publication 551.
Adjusted basis. The adjusted basis is your original cost or other
basis plus certain additions and minus certain deductions, such as
depreciation and casualty losses. See Adjusted Basis in Publication
551. In determining gain or loss, the costs of transferring property
to a new owner, such as selling expenses are added to the adjusted
basis of the property."
Schedule D
"(Form 1040)
Use Schedule D to report sales, exchanges, and other dispositions of
capital assets."
[...]
"Table 4–1. Do I Have a Short-Term or Long-Term Gain or Loss? Net Gain
or Loss Example.
IF you hold the THEN you have a...
property...
--------------------------------------------------
1 year or less, Short-term capital gain or loss.
More than 1 year, Long-term capital gain or loss."
[...]
"If you inherit property, you are considered to have held the property
longer than 1 year, regardless of how long you actually held it."
"Capital Gain Tax Rates
The tax rates that apply to a net capital gain are generally lower
than the tax rates that apply to other income. These lower rates are
called the maximum capital gain rates.
The term net capital gain means the amount by which your net long-term
capital gain for the year is more than your net short-term capital
loss.
You will need to use Part IV of Schedule D (Form 1040), and the
Schedule D Tax Worksheet in certain cases, to figure your tax using
the capital gain rates if both of the following are true.
• Both lines 16 and 17 of Schedule D are gains.
• Your taxable income on Form 1040, line 41, is more than zero.
The maximum capital gain rate can be 8%, 10%, 20%, 25%, or 28%. See
Table 4 –3.
The maximum capital gain rate does not apply if it is higher than your
regular tax rate."
"Table 4-3. What Is Your Maximum Capital Gain Rate?
IF your net capital gain is from...THEN your maximum capital
gain rate is...
-----------------------------------------------------------
Collectibles gain 28%
Gain on qualified small business
stock equal to the section 1202 exclusion 28%
Unrecaptured section 1250 gain 25%
Other gain,[1] and the regular tax rate
that would apply is 27% or higher 20%
Other gain,[1] and the regular tax rate
that would apply is lower than 27% 8% [2] or 10%
[1] Other gain means any gain that is not collectibles gain, gain on
qualified small business stock, or unrecaptured section 1250 gain.
[2] The rate is 8% only for qualified 5-year gain."
Publication 551
(Rev. May 2002)
Cat. No. 15094C
Basis of Assets
http://www.irs.gov/pub/irs-pdf/p551.pdf
"Inherited Property
Your basis in property you inherit from a decedent is generally one of
the following.
1) The FMV of the property at the date of the individual’s death.
2) The FMV on the alternate valuation date if the personal
representative for the estate chooses to use alternate valuation. For
information on the alternate valuation date, see the instructions for
Form 706."
[...]
"If a federal estate tax return does not have to be filed, your basis
in the inherited property is its appraised value at the date of death
for state inheritance or transmission taxes."
Thus, because the property is an inheritance, the gain of the sale is
categorized as a long-term capital gain. (See Table 4.1 and comment,
above.) The basis must be adjusted for additional expenses incurred in
selling and any taxes paid on the inheritance. (The lawyer, agent, or
title company that handled the transaction will have provided a
statement of costs.) The tax rate is found in Table 4.3. (q.v.)
Example Capital Gain Tax Calculations
Example 1
Assuming that there are no off-setting capital losses, and all of the
costs of the sale have been calculated into the basis, and the
personal tax rate is lower than 27%, then the sale of the inherited
real property will have a net long term capital gain of $20,000 -
$8,100 = $11,900, which would be taxed at 10%, a total capital gain
tax of $1,190.
Example 2
Assuming as in Example 1, except that the personal tax rate is higher
than 27%, the capital gain would be taxed at 20%. Therefore, the tax
would be computed thus: $20,000 - $8,100 = $11,900 X 20% = $2,380.
N.B. The actual tax rate and amount will vary as indicated in Table
4.3.
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All Google disclaimers apply. The above is not tax advice, nor is it
meant to substitute for such advice from a qualified tax consultant.
The information provided is as found, and is general in nature.
Individual circumstances may affect the applicability of the
information provided. See the IRS publications for details, or contact
the IRS for assistance.
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