When inheriting a house in New Jersey through the probate process there are some taxes you'll have to pay.  The taxes that will be paid are called Capital Gains tax.  Before getting into the specific rules of capital gains when inheriting a property, let us go over what it is exactly.

From the New Jersey Department of the Treasury, Division of Taxation, a capital gain is the profit you realize when you sell or exchange property such as real estate or shares of stock.  If you are a New Jersey resident, all of your capital gains, except gains from the sale of exempt obligations, are subject to this State's income tax (http://www.state.nj.us/treasury/taxation/njit9.shtml).  

When an heir inherits a property, the IRS (Internal Revenue Service) determines their basis in the property on the date of the owners death.  A basis is the difference between the cash price and future price of the property.  The IRS will use the house's fair market value to determine what your capital gains are.  Lets compare an inherited property to one that you have purchased.

Your House:

Purchased For: 100k

Current Marekt Value: 150k

If you were to sell your house you would be profit a total of $50,000.  You would be taxed on this profit.

Inherited House:

Purchase For: 100k

Current Market Value upon Death of original owner: 135k  (this would be your new tax basis)

If you were to sell the house for 150k now, you would profit only $15,000 and that would be your taxable income.

Another item to consider is what the tax rate will be.  In New Jersey there are long-term capital gains and short-term capital gains.  If the house is sold within one year of obtaining ownership, then this is considered a short-term and are taxed at a rate of ordinary income (i.e. same tax rate that is used against income from a job).  This rate is generally higher then the rate of long-term capital gains taxes.  The rate of long-term capital gains taxes may be regulated by the fedral government and is different depending on your tax bracket.  Since 2003 the long-term capital gains tax is 15%, but only 5% for the lowest two brackets.

Be advised though that holding out for a year in order to pay less taxes may be more costly as maintenance, property taxes will ad up quickly.  Do your homework and make the best decision for your situation.

If you wish to sell an inherited house and don't want to go through the hassles of fixing it up in order to sell on the market, or just not being certain when it will sell send Scott from http://www.ScottyBuys.com/Probate and he can help you out.  There is no obligation or cost.

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