I'm inheriting $44,000 from my father's house being sold in New York. I just want to know how much tax, if any, would I have to pay in South Carolina.
Thank You,
James, SC
Dear James,
Thank you for contacting TaxAudit with your question regarding potential taxes due on money you are inheriting from the sale of your father’s house. You live in South Carolina, but your father’s property was in New York, and you are concerned about the potential for state taxes due.
In general, there are instances where the beneficiaries of an estate are not liable for the taxes due on the sale of assets by the estate. When a person dies and their assets are left to their estate, there is an administrator of that estate, called the executor/executrix. Their job is to disburse the assets of the estate to the beneficiaries, in accordance with the will left by the decedent, (your father, in this case). If the decedent dies without a trust in place, the will needs to go through a probate process overseen by the court. If the value of the estate is large enough, the executor may also need to prepare and submit estate tax returns to the IRS and/or the state taxing agencies. The good news for you is that South Carolina does not have an inheritance or estate tax requirement and, while New York does not have an inheritance tax (an inheritance tax is a tax that is imposed on someone who inherits property or money), it does have an estate tax. For those who passed away during 2022, the fair market value of the estate’s assets would need to exceed $6.11 million before an estate tax return was due. Given that you inherited only $44,000 from the sale of the house, it seems unlikely that the value of your father’s gross estate exceeded this amount.
In more good news, generally when you inherit money from someone, that money is tax-free to you for both federal and state tax purposes. However, there can be some exceptions. For example, if you inherited the house from your father and then sold it at a gain, netting the $44,000 in cash, that amount might be taxable to you. When you inherit property, it becomes yours to do with as you please, but disposing of that property in a sale could result in a capital gain to you. But it also depends on what the property was worth when your father passed away, as the amount of cash received rarely corresponds to the actual reportable gain. You may want to refer to our previous blogs on this subject here and here. These blogs explain how property that is inherited, in whole or in part, receives a “step up” in the basis for the purposes of computing your taxable gain or loss on the property. If the property is part of a decedent’s estate and the property is not sold in the final year of the estate, then any taxable gain would be reported by the estate, not by you as a beneficiary.
I mentioned earlier that the amount of cash received may not correspond to the actual reportable gain or loss, and this is a concept in taxes that confuses many people, so let me explain this a little further. Most real estate carries a mortgage on the property that is secured by the property itself. While your father may have owned the home free and clear, especially if he had lived in the home for a long time, many people pass away still owing money on their homes. When that happens, the bank or other mortgage holder is paid off with the proceeds of the sale before anyone else receives any cash. So, the cash you received would be different than the actual gain or loss on the sale, as the amount of the mortgage is not considered when calculating a gain or loss on the sale of property whenever property is sold (and this is true whether it’s in an estate, or if you are just selling your own home). This is what many people find confusing, as they believe the mortgage somehow is calculated into the gain or loss.
For example, let’s assume your father purchased the property 10 years ago for $150,000, and, on the day he died, he owed a mortgage on the property of $100,000. At the time he died, the house was worth $225,000, and it sold for $250,000 a couple of months after he passed away. With the step up in basis rules, the taxable gain is $25,000 as the property’s “cost” is now $225,000, the amount it was worth when your father passed away (so, the difference between the $250,000 sale price and the stepped-up cost basis of $225,000 is $25,000). However, the actual cash received from the sale of the property is the difference between the sale price and the amount owed to the mortgage, or $150,000 ($250,000 sale price less $100,000 outstanding mortgage balance). As a result, you would receive a $150,000 check from the sale of your father’s house, even though the actual “gain” for tax purposes is only $25,000.
However, if you inherited the property and retitled it into your name, then held on to it for some period of time between when your father died and when you sold the property, you would need to report the $25,000 gain on the sale on your own tax return. This is because the house is now considered to be your property, not that of the estate. Regardless of how long you owned the property after the death of your father and the receipt of the property, the gain is always reported as long-term gain for inherited property.
We hope this helps clarify the rules for you on whether the proceeds you received are taxable or not. It sounds like it might be a nice time to take a long vacation in a nice resort on a tropical island.
Sincerely,
Carolyn Richardson, EA, MBA