This guide explains the tax return requirements you need to adhere to when you sell a home you inherited.
We will discuss the necessary forms you need to file for tax reporting to ensure you handle the process correctly.
Dive into the details to understand the complete picture.
Do I Have to Report the Sale of Inherited Property to the IRS?
Yes, most of the time, you have to report the sale of an inherited home to the IRS. The IRS considers the sale a taxable event that can lead to a potential capital gain or loss.
Consequently, the agency keeps tabs on real estate sales to make sure everybody is following the tax rules and reporting their income and capital gains correctly.
So, even if you think you qualify for an exclusion or exemption, it’s recommended to document and report the sale anyway.
There are a few situations when reporting isn’t necessary, such as when no official proceeds form is issued and there’s no capital gain or loss. However, these cases are rare.
It’s also important to keep in mind that not reporting the sale of inherited property when you’re supposed to can lead to significant tax problems.
That’s why it’s advisable to talk with a tax professional, ideally before you sell. They can give you a clear picture of your tax situation and point out ways you may owe less.
Where to Report the Sale of Inherited Property on Tax Return?
If you inherited a house and sold it, you’ll generally use two primary forms to report that sale for tax purposes:
- Form 8949: Sales and Other Dispositions of Capital Assets
- Schedule D (Form 1040): Capital Gains and Losses
Understanding where each one fits into the process helps you to accurately report capital gains on an inherited house or a loss if you sell the property for less than its established value.
Form 8949 is where you provide transaction-specific details and figure out whether you have a gain or loss on an individual sale.
Schedule D is a summary document. It takes the totals from Form 8949 and calculates your overall net capital gain or loss, and it’s the bridge that transfers that amount to your tax return.
So, even with one inherited house sale, you still need both forms.
You’ll also likely reference Form 1099-S to complete the other two, but you don’t file it with your tax return when you report income from the sale of inherited property to the IRS.
More details on Form 1099-S and the other two are provided below.
How Do I Report the Sale of Inherited Property on My Tax Return 1099-S?
When selling your parents’ home or other inherited property, you’ll likely receive Form 1099-S. Its official name is Proceeds From Real Estate Transactions.
Your closing attorney, or whoever handled the settlement, will send you this form and file it with the IRS.
For sellers, this form is a crucial information source. It includes details about the seller, the property, and, most importantly, data about the sale, including the gross proceeds.
You’ll use this information when completing Form 8949, which makes this form essential to calculating a capital gain or loss, which determines taxes owed.
Therefore, receiving an inheritance that includes real estate means you’ll need to understand this form’s role.
To sum it up, it plays a key part in how to report the sale of inherited property on a tax return and ensures that you and the IRS are working with the same information.
As mentioned previously, this form isn’t filed directly with your tax return. Be sure, though, to keep a copy for your records should you need to resolve any discrepancies that arise with the IRS.
How Do I Report the Sale of Inherited Property on Schedule D (Form 1040)?
Schedule D consolidates information from Form 8949, where individual transactions are detailed, and summarizes your net capital gains or losses.
If an inherited house is the only asset you sold, Schedule D only reflects the gain or loss calculated for that.
Since the sale of an inherited house is always considered a long-term gain or loss — no matter how long you’ve owned it — you’ll focus on completing that section of the form.
That’s the next-to-last step in reporting the sale of an inherited house. The net gain or loss is then transferred to Form 1040 where it becomes part of reporting your total income to complete the process.
Importantly, while you can deduct a loss on the sale of an inherited house, the IRS limits that deduction to $3,000 a year. It’s $1,500 for those married filing separately.
If you have other capital gains, you can use the loss to offset those first. Any remaining amount beyond the $3,000 limit can be carried forward to future tax years, subject to the same rules.
How Do I Report the Sale of Inherited Property on Form 8949?
The IRS requires you to complete Form 8949 to provide an itemized transaction record for the sale of an inherited house.
A critical component of filling it out relates to adjusting the property’s cost basis and the sales proceeds to determine the correct gain or loss.
The starting point is the cost basis, which is typically the property’s fair market value at the time of inheritance.
Then, post-inheritance improvements and other eligible costs can be added to raise that basis.
Similarly, selling expenses, like legal fees and some closing costs, can be used to reduce the sales proceeds.
In favorable market conditions, you can sell an inherited house for more than the cost basis. That could result in a capital gain.
However, by accounting for all eligible adjustments as outlined above, you may reduce or eliminate the gain, or even turn it into a loss.
These adjustments are clearly helpful. They are also central to understanding how to avoid capital gains tax on this inheritance.
Then, precisely documenting them on Form 8949 ensures accurate reporting and not paying more taxes than necessary.
Don’t forget that apart from real estate, proceeds from the sale of personal property are also reported on this form. Learn more about valuation of house contents for probate.
How to Sell an Inherited Property Easily?
Whether you’ve inherited a hoarder house or a fixer-upper, or just want a hassle-free sale, consider engaging with a real estate investor who specializes in buying inherited properties.
These buyers are well-versed in purchasing properties in any condition. Additionally, here are several excellent reasons why these direct buyers merit attention:
- Cash proceeds: You’ll get a cash offer, eliminating concerns about financing falling through.
- Expedited closing: These investors often finalize transactions in days, not weeks or months.
- No need for house repairs or cleanouts: Selling an inherited house as is means no costly repairs if you inherited a house that needs work, or time-consuming cleanouts if it’s cluttered.
- Streamlined transaction: You’ll find the paperwork demands are considerably lighter than a traditional real estate deal.
- Commission-free deal: A direct purchase eliminates the need for a real estate agent’s commission.
- Closing costs are on the buyer: Zero or few closing costs maximize your monetary takeaway.
Ready to explore this option? Our website features a vetted directory of reputable investors with the requisite experience to help you sell an inherited property fast.
Get a cash offer from different companies and compare them carefully to see which best aligns with your needs.
Learn about other selling strategies from our guide on selling an inherited home. Its expert insights will help you work through this unique real estate challenge with confidence.
