Inherited real estate? Reduce the cost of inheriting a home. Maximize your tax deduction and donate real estate to charity
When you inherit a home, you’re not only inheriting your loved one’s legacy but also taking on additional financial responsibilities. Between the mortgage, utilities, repairs, yard maintenance, property insurance and taxes, owning property is an expensive endeavor. If you already own a home, taking on another property can be double the stress of home-ownership.
Fortunately, as the heir of your loved one’s real estate, there are ways you can save money whether you keep it or sell it. And you may be surprised that all of these involve beneficial tax deductions.
Read on for more info and to find out if you are eligible, so you can reduce the cost of inheriting property.
Can you deduct real estate property taxes?
One of the largest expenses associated with owning a home is typically property taxes. The good news is as long as you itemize your deductions, no matter if you decide to move into the home you inherited or keep it as a rental, you’ll be able to deduct the property taxes.
There is a cap of $10,000 per year on the amount you can receive in property tax deductions, even if your property taxes exceed that amount.
Only the person on the title can take the tax deductions for real estate property taxes. If the real estate you inherit has delinquent property taxes, you won’t be able to deduct them on your own returns even if you paid them because the taxes pre-dated your ownership.
For example, let’s say you inherit a home with $15,000 in back taxes owed. You decide to keep it as a rental and pay the taxes. Then you get a new tax bill in your name for $17,000. Even if you pay it, you’ll only be able to write-off $10,000 at most. This is because the back taxes owed could only be written off by your loved one, and the $7,000 of your new bill is ineligible for the deduction.
Can you deduct a loss on the sale of real estate?
In the event you decide to sell your inherited real estate, you may consider selling at a loss to avoid paying any capital gains taxes and write it off. So long as you have never occupied it personally, this is generally allowed.
The amount of your loss that you will be able to deduct, however, will be limited to the difference between the price you sell it for and the fair market value of the home when you inherited it.
To illustrate, let’s imagine you inherited a home that was originally purchased for $500,000 in the height of a real estate bubble, but the day you inherited it was worth $400,000. If you end up selling it for $300,000, you are only eligible to deduct $100,000 as a loss and not $200,000.
Can you deduct a loss on the sale of a second home?
Typically, you can deduct a loss on the sale of a second home. However, if at any point you inhabited the home as your personal residence, even if you decide to use it as a second home later, the total loss that you can deduct is affected.
The IRS has policies to make sure that any loss in the home value that you experienced while occupying the home as your personal residence is not written off.
For instance, let's assume you inherit a $200,000 home. After living in it for several years, the market tanks and the value of the home drops to $150,000. At that point, you decide to move out, and then a year later sell it for $125,000. Even though you sold it for $75,000 less than the value of the home when you first inherited it, you're only able to deduct the loss covering the timespan it was not your personal residence, which would be the difference between $150,000 and $125,000, or $25,000.
How to maximize your tax deduction?
An alternative, and better way, to maximize your tax deductions when unloading real estate can be to donate it to a charity like DAV (Disabled American Veterans).
By donating real estate to DAV, you can deduct the fair market value of the home as a tax loss while supporting a mission that empowers more than 1 million veterans every year. Using the previous illustration, if you were to donate the home to DAV instead of selling it, you would be eligible to deduct $150,000 as a loss because that was the new fair market value of the home.
Depending on your income and filing status, you are limited to a specific percentage of tax loss deductions each year. If you had sold the home at a loss, you would only get to write off $25,000 one-time versus writing off $150,000 over the next five years . That’s a significant difference!
In many cases, donating inherited property to charity instead of selling greatly benefits heirs who would otherwise be financially burdened with the inherited property. It’s an opportunity to turn an unintended burden into an uplifting gift that is used to help wounded, ill and injured veterans and their families.
How Donating Real Estate to DAV Was the Answer
A Florida attorney tasked with being the executor of a client’s will found refuge in taking this approach. His client had possessed a restaurant, storage units, and several commercial buildings—all of which were a financial drain on the estate in keeping up with monthly expenses, utility bills, and other costs.
Acting quickly, the attorney contacted DAV to arrange for the sale of the property. By working closely with the current property manager, they were able to list the property and sell it for the benefit of America’s veterans.
By donating the property’s proceeds to DAV, the benefit to the estate was twofold. There was a large tax deduction for the estate and the client’s legacy was honored through his estate’s assistance to those who bravely fought for our country.
To learn more about donating your own home or other real estate to DAV, while maximizing the tax benefits to you, contact us at 844-277-HOME or fill out our form on dav.org/real-estate-donation/.
This article is for informational purposes only and does not constitute formal advice. Individual tax situations may vary so please contact your tax advisor if needed.
