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Inheriting a House and Tax Implications

3/15/2017 |

Fiction: If I inherit a house, the tax implications are the same no matter what I do with it.

Fact: Tax implications vary widely depending on your actions and the time you take to decide how to handle the inheritance. If you sell the house right away, you'll pay long-term capital gains on the sale price over the stepped-up cost basis that you received when you inherited it (in other words, the property's fair market value when the death occurred). If you decide to move in, you could end up paying higher property taxes because of the step-up in basis, but you could avoid capital gains if you stay there for at least two years and sell it within five years of taking up residence. The other option—renting out the house—means you can deduct certain improvements and the depreciation of the house itself against your taxable rental income. Just know that you'll have to reimburse the IRS for that depreciation if you eventually sell.

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