Posted by UNIVERSAL ACCOUNTING & FINANCIAL SERVICES INC.

The Biden Administration May Affect Changes in Inheritance Tax & Stepped-Up Basis Rules.

The Biden Administration May Affect Changes in Inheritance Tax & Stepped-Up Basis Rules.

If you're inheriting a relative's home, President Biden's plans to eliminate the stepped-up basis tax rule should be of concern to you. You may have seen bits of news on this topic on social media. The basis for these viral posts is true, although some of them may be a bit too over the top. President Biden has expressed interest in changing tax codes that affect inheritance, including properties.

Here's the hard part: You can't predict tax code changes until they happen. For financial advisors, this has been a problem in recent years, as tax codes are subject to change with the political party in power. This proposed tax code change would affect everyone who has something of value to leave.

We cannot say that the stepped-up basis tax rule will be eliminated. Currently, other things could be a priority for this government. However, there are indications that this change could be on the horizon as early as possible. The best way for homeowners to keep abreast of current and planned changes is to learn about their best financial strategy per applicable tax laws.

If President Biden is able to eliminate the step-up basis of a person's death, everyone should be concerned about what this will mean for the heirs and beneficiaries. A review of their estate planning documents will be necessary to ensure that taxes can be reduced as much as possible.


What is an estate tax?

An estate tax is a tax on the transfer of property after the death of a person. In 2020, the beneficiary was not required to file an estate tax return with the IRS unless the property's total value is $11.58 million or more. Some state's inheritance or property taxes are lower. The estate tax itself is estimated at the property's total value before being distributed among the beneficiaries.

With the current tax codes, you will be taxed for any profit from the sale based on the home's appraised value when you inherited it. For example, if you sell your father's house and it was worth $ 150,000 when you inherited it but ended up selling it for $200,000, you will have to pay capital gains tax on the $50,000. This enhanced exemption currently applies to inherited properties. If, for example, your father bought the house for $80,000 and sold it for $190,000, the capital gains tax would increase by $ 110,000. You can understand why the differential tax rule is advantageous for those who wish to leave assets to their beneficiaries.


Property and Inheritance Laws in the Certain States

The IRS has its own inheritance rules and regulations, but you should also consider inheritance laws and taxes in your state. Each state has its tax and inheritance laws (consult your tax advisor for help).

Inheritance tax can be an issue for you if you inherit a home in Maryland because there is an inheritance tax in that state. Inheritance tax in Maryland can be increased by 10% for assets transferred to the deceased's non-spouse or blood relatives. If you inherit a house in Virginia, inheritance tax applies to any inheritance over $15,000. If you inherit a home in Washington DC, inheritance tax applies to anything over $4 million below the federal limit.


Other problems related to the inheritance of a house

Often, the taxes you pay come from the sale of a home. Many family dynamics and issues can influence your decisions about selling your father's house or managing any property you inherit.

Some questions you might have:


If I inherit a rented property, is it taxable?

If the rented property was part of a larger property, the property would have to pay taxes before changing it. However, some tax considerations should be considered regarding rental properties if you decide to keep them. There are several options. If you decide to sell the leased property, the same capital gains tax you would have paid by selling an inherited private home will apply.

The rented property may already have tenants. If this is the case, you will need to consult your existing lease and decide if you want to keep the leased property. Typically, your options are to sell, move, or rent the property. The capital gains tax at the time of sale would have been calculated based on the market price at the time you took control of the property over the sale price.


When you inherit a house with a mortgage, how does it work?

There are several scenarios in which you inherit a house with a mortgage. If there were larger property or insurance policies, the deceased could have had the property pay off the mortgage's remainder. In this case, the mortgage will be paid, and you will have the house to sell or to keep. In many situations today, older residents can have a reverse mortgage. This arrangement helps maintain their accounts until they are dead. The total amount owed for this mortgage is never more than the value of the house. The beneficiary will then sell the house, pay off the reverse mortgage balance, and keep the rest as an inheritance.

If there is a mortgage and you don't intend to pay it, the borrower will take care of the payments. There are laws to protect beneficiaries so that the mortgage company cannot demand the existing loan's full payment. Most people cannot afford an additional mortgage, so the option is likely to rent, sell, or live on the property.


If I inherit a house with my siblings, what are my options?

There may be provisions in the will that the siblings own as a percentage of the property. The property is often shared equally among all the siblings. When you inherit a home with your siblings, it often becomes a personal choice as to which way to go. A sibling may want to live at home. If so, they would normally take out a mortgage to pay off the other sibling's inheritance. You can decide to sell the property and divide it that way. Some siblings will also decide to keep the house for rent.


If I inherit a house that needs renovating, what are my options?

Believe it or not, it's quite common to inherit a house that needs a lot of work. Older family members often have outdated homes. This can range from very old furniture to serious problems such as old mechanical equipment and a leaky roof. When your home needs to be renovated, the best options depend on your ability to repair the damage and renovate your home. Some people are very good at this type of work and see it as a side project. It can mean making a good profit by selling your house. You may also decide that you like the updated space so much that you keep it.

If you don't have the skills and the investment seems too big, you can sell the house as-is. There may be cosmetic things you can do to increase the selling price, but it may not be worth a significant investment depending on the market.


Conclusion

If you have inherited a house or know that you will inherit a house shortly, you may have concerns. Many decisions have to be made about how the property is managed, whether it is sold or how the tax implications are understood. Inheriting a home is also an exceptionally emotional experience. There are mementos of the deceased wrapped in possessions. It could also be the house you grew up in.

All of these things can get confusing in the process so this is why it is important to consult  professionals like UNIVERSAL ACCOUNTING & FINANCIAL SERVICES, INC. so as to find out the best possible action to take.


FOR MORE INFORMATION ON HOW THEY CAN BEST HELP WITH YOUR TAX FILING NEEDS, PLEASE CLICK THE BLUE TAB ON THIS PAGE.


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