Capital Gains Tax On Homes - How It Works

December 6, 2004
By Srinidhi Goenka

The capital gains tax on homes is extremely complicated. There are different clauses for various situations and it is very easy to get confused and mixed-up about what you actually have to pay.

If you have received your house as a gift, or if you have inherited it, or if you have purchased it - different conditions exist for all. Thus, it is always better for a home-owner to consult a tax expert to get proper guidance on this topic.

In this article, we are describing one situation related to the inheritance of residential property. Here, the capital gains tax on a home which has to be further rented out and then sold is being considered.

Inherit And Rent - What Tax Do I Pay?

Let us assume that you are a trustee for your parent's estate. They plan to shift to an old home and would like you to have their property after they are gone. You plan to rent the property out till they are alive and then sell it once they are dead. They are currently eligible for the $125,000 home sale-tax exclusion. So, the question arises that how you handle the capital gains tax in this case.

Normally, any appreciated asset which is inherited is taxed on the basis of what the original owner paid for it. But in the case of houses, it also includes the cost of improvement less the depreciation claimed.

So, if you plan to sell the house after your parent's death, your net capital gain i.e. tax basis less the sale price, will be very minimal. In other words, the difference between the appreciation of the value of the house over the years from the time of purchase will offset the depreciation claimed by you during the rental period. Hence, you will hardly have to pay any capital gains tax.