What Taxes are Due When Children Inherit Home?

McNair Dallas Law

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My sister passed away. Her only possession was her home, which still has a mortgage and she left it to my son and daughter, her niece and nephew. What inheritance tax will there be?

When an adult child inherits their parent’s home, there is often uncertainty about what taxes are due. Sometimes the decedent’s the will addresses how inheritance taxes will be paid, says nj.com recent article entitled “My adult kids inherited a home. What taxes are due?” . The mortgage may say the estate itself will pay it before anything is paid out to beneficiaries, or it may not mention anything.

Iowa, Kentucky, Nebraska, New Jersey, and Pennsylvania are the only states that impose an inheritance tax on what you receive as the beneficiary of an estate.  Maryland is the one state that has both an inheritance and estate tax.

Spouses and certain other heirs are usually excluded by the state from paying inheritance taxes.

A child may have an issue if there’s not enough liquidity in the estate, separate from the house to pay the taxes. If the beneficiaries plan to keep the home, they would need to take an additional mortgage.  They would also need to find enough cash to pay the amount due.

The Executor of the will should hire a licensed real estate appraiser and pay for a date of death appraisal on the property. That appraisal will determine how much capital gains would be exempted. It can also be used to establish a new basis for capital gains purposes if needed.

If the heirs simply do nothing and move into the house, the inheritance tax will come due.

If the inheritance tax isn’t paid, liability for the unpaid amount will attach to the executor personally, often in the form of a certificate of debt attached to some asset belonging to the executor, like his or her house.

To make sure this is handled correctly, consider speaking to an experienced estate planning attorney, who can walk you through the process.

Reference: nj.com (June 14, 2021) “My adult kids inherited a home. What taxes are due?”

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