If you or someone you know has inherited a property in Pennsylvania, you may be aware of the state’s inheritance tax. But just knowing about Pennsylvania’s inheritance tax isn’t enough. You should also ask yourself the following questions if you inherit a house in Pennsylvania:
- What are the tax consequences of selling an inherited property in Pennsylvania?
- How much is the inheritance tax in Pennsylvania?
- Do I need to pay capital gains taxes on inherited property if I decide to sell it?
In this blog post, we’ll provide answers to the questions above so that you have a better understanding of the taxes that you have to pay when selling an inherited property in Pennsylvania.
Inheritance Tax on Property in Pennsylvania
Pennsylvania is one of six states that imposes an inheritance tax on heirs who receive assets from an estate. This means that if you inherit a home in Pittsburgh, or anywhere else in Pennsylvania, you are responsible for paying an inheritance tax. This tax is due within nine months of the date of death of the individual who bequeathed you the house. A special tax form – the REV-1500 – is used for this purpose. It’s worth noting that the rate of inheritance tax on property is different in each case and it depends on the heir’s relationship to the deceased. The table below outlines the different possible inheritance tax scenarios in Pennsylvania.
Parents (from a child 21 years of age or younger)
|Lineal descendant (parents, children, grandchildren)||4.5%|
|Sibling (brother, sister)||12%|
|All other heirs (excluding charitable organizations, government entities, and exempt institutions)||15%|
While the inheritance tax is state-specific, the federal estate tax is another tax that must be considered. In reality only 2% of estates in the United States are subject to this tax, as it applies only to estates worth in excess of $11,400,000. Still, it’s important to be aware of the estate tax in case it applies to your situation, as the estate tax rate is currently 40%.
Capital Gains Tax on an Inherited Property
It’s common knowledge that most properties increase in value over time. That means that an inherited property may have capital gains when you decide to sell it. The question is – how much tax will be owed when you sell the property? The answer depends on the “basis” for the property, or the purchase price plus any improvements made during ownership.Luckily, the basis on an inherited property is calculated based on when you inherit the property – not when the deceased originally purchased it. In other words, the value of the property at the moment you inherit it would be the starting point for calculating the capital gains tax on inherited assets. This is called the “stepped up” basis.An example of the “stepped up” basis concept is as follows. Let’s say the deceased purchased a property 20 years ago for $50,000. Upon his/her death, you inherit the property, which has a current value of $200,000. You decide to sell this property in two years, and at that time it is worth $210,000. In this scenario, you will only owe taxes on $10,000 in capital gains ($210,000 – $200,000), as this is the amount of appreciation recognized during your ownership. If the deceased had sold the property, he/she could have been subject to capital gains taxes of $160,000 ($210,000 – $50,000). In this example, the basis was “stepped up” from $50,000 to $200,000).It’s also important to note that you’ll pay less in capital gains tax on property if you choose to sell an inherited house after holding it for one year. In this case, you’ll be able to qualify for the lower long-term capital gains rates. These rates can be 0%, 15%, or 20% depending on your tax bracket. If you sell the property in less than a year, you will be taxed at the same rate as your tax bracket for that year.
Selling an inherited property in Pennsylvania comes with at least two taxes that you need to be aware of – inheritance tax and capital gains tax. At McIntosh Management, LP, we have worked with homeowners in this situation and can help you understand the options that are available to you. If you need to sell an inherited property in Pittsburgh, contact us today to get started on obtaining a no-obligation estimate on the value of your house. With our company, you’ll be able to sell your property quickly and be confident that you understand the tax implications involved.
2 responses to “Pennsylvania’s Inheritance Tax: What You Need to Know if You Inherit Property in Pennsylvania”
If I inherit a property in PA and pay the required amount of inheritance tax, can I add the amount of inheritance tax paid to the basis of the property when calculating the amount of gain or loss when I sell the inherited property?
Hi John, thanks for your question. Since we’re not tax advisors we can’t provide an answer to your specific question; however if you send us an email we’d be happy to put you in touch with a CPA who can help address your individual situation.