Paying Taxes When Selling an Inherited Vacation House

While it may seem great to inherit a vacation house, in actuality it may not be practical to keep the property, especially for tax reasons. 

There are many factors to consider when inheriting property, including taxes, any mortgage, and other owners. But if you know you do not plan to keep the property, it is better to sell it sooner, rather than later. 

Property like a house or stocks usually appreciates in value and is worth more than it was when the original owner purchased it. If you were to sell the property, there could be huge capital gains taxes. Fortunately, when you inherit property, the property’s tax basis is "stepped up," which means the basis would be the property’s value on the date of death.

For example, suppose you inherit a house that was purchased years ago for $150,000 and is now worth $350,000. You will receive a step up from the original cost basis from $150,000 to $350,000. If you sell the property right away, you will not owe any capital gains taxes. If you hold on to the property and sell it for, say, $400,000 in a few years, you will owe capital gains on $50,000 (the difference between the sale price and the stepped-up basis).

If the property is located in a different state from where you live, be warned that there may be a tax for selling real estate and moving to a new state. For example, New Jersey has an “exit tax” on the profits from any sale when you are moving out of state.