Do I need to pay taxes after I've sold five rental houses with no profits?

Question

I have inherited 5 rental houses after my dad passed away two years ago. Is this considered an income tax or what?

Thanks!

Answer 1

As Bostonian correctly noted, your cost basis is the FMV on the day your father died.  If you sell at above that rate, you have to take capital gains.  If you sell for less, you actually have a capital loss that can offset income and reduce your taxes, but you do have to include the depreciation of the properties, even if you haven't been claiming it on your annual return.  There are also realtor expenses linked to the sale that can be claimed.

I agree that you shouldn't try to handle this yourself.  A lot of people go to tax professionals who have very simple returns and really should just file on their own, but I would say that as a general rule, almost any year you have a real estate transaction, it's worth the money to have your taxes filed by a qualified professional.

Answer 2

US federal inheritance tax is different from income tax, and is almost nonexistent right now

You need an accountant or tax professional, and the sooner you see them the better

The value of the rental property is determined at date of your father's death or 6 months after.  Then the value upon sale is value for which you sold them, less your deductible costs.

1099s were issued upon each sale and you probably need to file to show IRS that there is no gain, you don't file and they treat all $$ realized as profit and want mucho taxes from you

As mentioned above, you need to recapture the depreciation taken/or allowed during your years of ownership, and that can result in capital gain. . . . .but capital gains are taxed at a lower rate than earned income. . . .

Answer 3

This is a pretty complex transaction.

You will have to recapture any depreciation taken in the two years since you have owned the houses.  Also, you would have to pay Capital Gains taxes on the appreciation of the houses in the past two years (if any) less expenses.

I am guessing that you won't have too big of tax bill due to the sale but you may have one.

See a professional.  This is not something that  you want to handle on your own.

Answer 4

Your basis in the houses is whatever the FMV was on the date of your father's death, not his original basis as claimed by another poster.  If you sell them for more than that basis, the difference is taxable gain.

Don't forget that you must recapture the depreciation that was allowed or allowable while you held them as rentals.  This often is overlooked and can result in a significant taxable gain.  Also note that this portion of any gain (the depreciation recapture) can be taxed at a higher capital gains rate than the normal 15% tax rate.

I would suggest you consult with a local tax pro on this as the sale of any depreciable asset can get pretty messy when it comes to tax time.

Answer 5

I'm sure you were hit with the inheritance tax, but I'm thinking maybe in this economy, you should hold onto the houses.  I've got 4 of my own and I won't sell.  You will get profit from the rents, as long as you can calculate the annual property/school taxes for each and rent accordingly.