Q: My Dad died in Jan 2021 & owned a home in MD, with no estate. No other accounts or income.
From reading, I don't need to file income or estate taxes. I'm confused on the capital gains. Please help. Thank you!
A: Under federal income tax law, the tax basis of your father is "stepped up" to fair market value on his date of death. That is the basis you would use to determine capital gains, if any.
So for example, if you dad purchased his house for $75K in 1995, and when he died in January it was worth $250K, the tax basis you use for calculating for taxes is $250K. If you sell it 2 years from now for $275K your capial gains upon which tax is calculated is $25K.
This is federal income tax law. Maryland state income tax may differ. I don't practice in Maryland. I hope this helps.
Are you selling the property? If not, you typically would not calculate capital gains tax at this stage. When you do sell, the capital gains will depend how you received the property, how much it sold for and what the original value or "basis" is. Typically an accountant or other tax professional preparing your income taxes will help calculate the capital gains for the tax return related to the year the property is sold.
To figure out what potential capital gains tax you might owe (or not) based on current law, a few preliminary questions need to be answered. First, did you inherit this AFTER your dad's death or were you added to title when he was still living? If you inherited, current law provides a "stepped up" basis, meaning the new owner's starting value would be the date-of-death value. The ending point would be the sale price and the difference would be the new owner's "capital gain." (or loss). If someone is given the property as a gift during the original owner's lifetime, they'd typically get the same basis as the original owner - meaning the starting point would usually be what the original owner paid for the property (plus certain improvements). Some kinds of deeds are more complicated, like life estate deeds without powers or situations where someone gets a partial interest during the owner's lifetime and the rest when the original owner dies.
That said, your post raises a few more thoughts. If someone "owned a home" in MD, and they had "no estate" how did the real estate transfer out of the deceased person's name? Ordinarily anything someone dies owning titled in their name is a part of their probate estate. In Maryland, the heirs would need to open a probate estate, wait the requisite time frame and then transfer the property pursuant to the Will (or if no Will, the laws that describe what happens to MD property when someone dies without a Will). Often an important factor in most cases involves transferring the property out of the deceased owner's name - it is not automatic unless the property transferred by deed.
While I hope this post helps it is not legal advice. I'd encourage you to consult with an attorney who understands both estate and real estate law - our firm regularly handles Life Estate, Personal Representative and Trustee deeds, as do many other attorneys. Any experienced attorney practicing in this area should be able to quickly retrieve the existing deed and let you know whether or not you need to open an estate to transfer the real property.
Note that a variety of other tax implications can come into play, depending on the circumstances, so it really helps to sit down and talk to someone about the specifics.
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