Tax Guidelines for Inheriting a Vacation Retreat
Inheriting a vacation retreat can be a bittersweet moment. A loved one was lost, but upon this happening you received a piece of real estate. While there are many benefits of inheriting a vacation retreat, you must also realize that there are things that need to be done before you are ‘free and clear.’ You have to think about everything from inheritance tax to estate tax to other heirs that may own a share of the property.
As soon as ownership of the vacation home is transferred, there is a good chance that you will owe estate and/or inheritance tax. It is important to know exactly what situation you are in, and to ensure that you pay the proper amount. Remember, ignorance is no excuse for not paying the inheritance tax that you owe.
Some people think that inheritance tax is not imposed on the transfer of real estate ‘ nothing could be further from the truth. The rate that you pay depends on your relationship to the descendent. For example, if you live in Pennsylvania and are the spouse of the descendent, you will not owe any inheritance tax. If you are a child, on the other hand, you will be taxed at a rate of 4.5 percent.
Additionally, the federal government may charge estate tax on the property depending on its overall value.
Some states have an estate tax, some have an inheritance tax, and some have both. Where you live greatly determines how much inheritance tax, if any, you will owe when you receive the property.
Once you have your estate and inheritance tax straightened out, you may consider selling the vacation home. While this sounds like a great idea, you are probably going to be taxed once again. In most cases, you will be required to pay capital gains tax on the difference between the net proceeds from the sale and your basis. At this time, the federal capital gains rate is 15 percent.
Inheriting a vacation retreat is a big deal for many reasons. It can be difficult to deal with this situation, as you recently lost a loved one. That being said, they wanted you to have the home. Make sure you are familiar with the estate tax and inheritance tax that you could potentially owe. This way you can freely do what you want with the property in the future.