Q: Is the property sale of a deceased child considered an inheritance and if so does it exempt them from some or all taxes?
A family friends son passed away. They are in probate to sell his home and pay off his debts, they are the only heirs. They live in CA as is the home being sold.
A: Hard to say for sure but typically most probate assets are received tax free. The exception are things like 401ks and retirement accounts. Happy to chat about the details if you contact me directly.
A: When son died, the property most likely received a step up in cost basis for income tax reporting purposes to its then fair market value as of son’s date of death, which means there would be no capital gains tax payable on the proceeds of sale up to the property’s new fair market value cost basis. It’s also unlikely that there would be a estate tax or an inheritance tax on the gift. And there should be no change in the son’s property taxes either. But you really should consult with a lawyer or CPA for specific advice.
A: Generally speaking, inheritance is not subject to tax in California. Therefore, a beneficiary will not have to pay tax on his or her inheritance. However, there may be U.S. estate tax (for probate estate assets in excess $11.58 million dollars in 2020.) In that event, the estate tax is paid out of the estate, so beneficiaries will not be personally liable for paying the estate tax, technically speaking, although it would deplete the amount left in the estate for distribution.
There still might be income tax issues for the probate estate. For example, if the son's estate assets generated income after the son passed away. If reportable, it would be taxable to the estate and reported on the estate income tax return.
It is always best for the probate estate's personal representative to consult with a tax professional.
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