Q: For a property in PR, which amount is subject to taxation for a resident of the US who inherited it when sold?
Ex. - Juan's mother dies in 2020. Juan inherits this property at this time. He is going to sell it in 2023 for 200K. Is 200K the taxable amount, or is the taxable amount a percentage of the appreciating value between 2020-2023? (Step up basis)
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A:
When Juan inherited the property in Puerto Rico in 2020, the basis of the property for tax purposes would typically be the fair market value at the time of inheritance. This is known as a "step-up" in basis. When he sells the property in 2023 for $200K, the taxable amount would generally be the difference between the selling price and the stepped-up basis.
For example, if the fair market value of the property when Juan inherited it in 2020 was $150K, and he sells it for $200K in 2023, the taxable gain would be $50K ($200K - $150K). This gain is what would be subject to capital gains tax.
It’s important for Juan to have the property appraised at the time of inheritance to establish the stepped-up basis. Without this, determining the accurate gain upon sale would be challenging.
Given the complexity of estate and tax laws, especially with property in Puerto Rico, Juan should consider consulting with a tax professional or an attorney. They can provide specific guidance based on the details of his situation, ensuring compliance with all relevant tax laws.
Remember, accurate record-keeping and understanding the basis of inherited property are key factors in determining tax obligations on the sale of such property.
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