My brother and I are selling off a house and out buildings off the farm we inherited several years ago. We have rented the house out for years and ready to sell with a few non tillable acres. Anyone knows how the capital gains work? Thanks

In Texas and I think everywhere you have to have lived in it as your primary residence within the last two years to avoid the CG's. I don't know about the rest of the country but in Texas it also counts if you've "homesteaded" it within the last two years. That's how it was explained to us when we sold our last house.

On an inheritance I think your cost basis is the value at inheritance. If the value of money has decreased since then, you'll owe taxes on the current value or the real estate, I think.

Your best bet is to talk to a tax accountant. If you just rented it out the whole time, claimed any depreciation, depending on what side of the table that was, etc. will determine your standing. To reduce your CGs to a minimum or nothing, would be for one of you to move Into it and make it the primary residence for the allotted minimum time, as 3hundred said.

It will be based off the price of what the property was worth when you took ownership of it and what it's worth now.

You will have to claim the house sale proceeds, since it isn't your primary residence. You will also have to claim the rent as income. Time to talk to a tax expert to see what your options are. Do this before you sell!

The best time to have seen a CPA would have been several years ago.

Now you still need to see a CPA.

Do you have records of everything? What the place was worth when you inherited it, what your expenses have been over the last few years, what the income has been, etc.? Have you been filing taxes all along and reporting the income from the rental? If you've been reporting the rental income and taking depreciation on the house then you should be in good shape. If you haven't been paying taxes on the rental income then you might be in trouble. Good luck. Find a tax accountant in town who handles small stuff like that and be prepared to drag along all of your records.

You should have had it appraised when you took ownership. I went through this 4 years ago when I bought my brother out of my mothers house. My CPA said this would set the value so when I sell it that would determine how I would get hit for CG's. The best way to over come the CG tax is when you sell it have money in an escrow and you have time to use the complete sale price towards another piece of property and not have to pay CG tax.

see this link:

https://www.investopedia.com/articles/personal-finance/121415/how-prevent-tax-hit-when-selling-rental-property.asp#:~:text=Real%20estate%20investors%20can%20defer,after%20the%20exchange%20is%20made.

Inheritance taxes depend on the type of inheritance. Cash is usually tax free since all taxes will generally have been paid on it by the deceased. Property is different. Like any property, you pay CG taxes on the difference between the purchase price and sale price. Since the deceased hasn't done this, the inheritor will have to pay CG tax on the the difference between the deceased purchase price and the appraised value at time of inheritance (transfer of ownership). Then if you sit on the property for a few years and it goes up in value you will again pay a CG tax on the difference between the value at time of inheritance and the sale price. But all this is no different than you buying a building in 1960 for $5000 and selling it today for a half million and paying CG tax on the profit.

One generally inherits at the step up value in the USA. if the property is under a certain very high value. The OP should talk to their CPA.

Some States, like Pennsylvania I believe, have very unfavorable inheritance taxes.

A lot of issues here.

Rental property, potential depreciation recapture (which suck for those in any lower tax bracket) for one.

Was there a return done for closing the estate and transferring title? Is the property held in a trust? You will get stepped up basis on the property, but, there may be other considerations here. Too much to consider for a responsible answer.

You really have a situation that would warrant speaking with a seasoned estate/inheritance tax professional. I used to work as a CPA and would not rely on any answer on this board as substantive to your situation. Too many unknowns. JMHO

Nailed it !!

Rules change from state to state. You might owe federal but not state,state but no federal, both ,neither? Check with professional.

Talk to a tax accountant, as stated.
In Iowa (where I live), it applies to flipped real estate that you buy and re-sell within 24 months (last one I did I bought and then sold in the 25th month, therefore no capital gains)
And, yes, the Capital Gains tax is only subject to the value that you gained in the two year period (so, if your Capital Gains is 30%, and you bought a home for $100,000 and sold it for $200,000, you would pay Capital Gains on $100,000 increase. That can be offset by improvements, though, so keep that in mind as well).

Good luck!

JS

The value of the house on the date of inheritance is your "cost" for the house.

Assuming you reported the rental as income, then you would have also recorded depreciation on the rental property.

Then you can add in capital improvements if any. Items like a new bathroom, kitchen remodel or siding.

So at this point what you have is the following:

Cost (Value on day of death) $xx,xxx
Less:
Depreciation taken x,xxx

Add:
Any capital improvements xxx

Adjusted Cost $xx,xxx

Sales price will be amount paid less related costs of sale. things like paint and cleaning company to prepare for sale.

Sales price $xx.xxx
Less
Agent fees paid x,xxx
Fix up for sale costs x,xxx

Adjusted Sales Price $xx,xxx


Calculate capital gains.

Adjusted Sales Price Less Adjusted Cost will be the taxable amount. If negative no tax will be calculated.

So the rate is calculated based on your income.

Since you said you rented it for a couple of years it will be considered long term capital gains. I am guessing it is for a single taxpayer if married it is even more favorable.

If your income is below $40,000 tax rate is 0%. No tax to be paid
Income for 40,001 to 441,450 15%
Higher is 20%

Depending on how flexible the OP with his income and timing he could adjust his income in the year that he sells the house to reduce or eliminate any taxes. This is much easier to do if self employed.

I was surprised this afternoon to find that for single filers for 2019 the first $39,375 of long term capital gains is taxed at zero.

So much was made of
putting a $10,000 maximum Federal deduction for State and Local Taxes ( SALT)
that the good news
of being able to pay zero tax on say,
buying old cars or parts,
holding them more than one year,
and hopefully selling them for a capital gains profit with zero tax due
got lost in the “media noise.”

Before this afternoon,
when I thought of avoiding Federal taxes
I thought of municipal bonds.

It makes more sense now
to putting in any free hours and energy into
figuring out how to make up to a $40,000 one year or more Capital Gain.

Wrong Fake News that's if your total income total is under $39,375. over it's 15% up to $434,550 and 20% over that amount.

Some people structure their finances so that most of their income is capital gains. If you don't work for a paycheck it gets easier to move things around. Not sure if any of this is helpful for the OP though.

My wife just finished out taxes, and we sold a property we had for nearly 30 years. I also bought a tractor last year, so it really helped offset the hit. Nothing like being DINK at an higher tax bracket- and hearing parents whine about some bump in expense they are having to pay for their kids school expense. Dude! I am paying to educate your kid. Go a year and not take the dependent deduction, your getting a bargain. Its actually a welfare program.