How do estate sales work when it comes to taxes?
Say a family member passed away and you were designated as the beneficiary, or you’re an empty nester looking to downsize your home (and get rid of your belongings). In these cases, you might consider having an estate sale.
“What is an estate sale?” and “How do estate sales work?” you wonder… It’s similar to a garage sale – but most of the time it includes all property within a home (minus the actual home). Estate sales are often managed by a professional, who may handle all aspects of the sale (Not a realtor like you’d use for selling real estate.)
If you’re thinking about hosting an estate sale, you may have the question, “Do you pay taxes on estate sales?”
Luckily, we’re here to help. This post will guide you through the estate sale tax implications so you can stay compliant with IRS guidelines.
Do you pay taxes on estate sales?
If you’re hosting an estate sale selling artwork, furniture, clothes, or other goods, you’re probably wondering about estate sale taxes.
There are a few tax scenarios as a result of your sale, like the transfer of property after a loved one dies, or if you simply want to downsize the amount of real property you own. Here are some details:
1-Real property sold on behalf of an estate
If you’re the beneficiary of an estate and you sell items within the estate during an estate sale, there are specific tax guidelines to follow. If the goods are being sold on behalf of the estate of someone who has passed away, then the sale is reported on the estate income tax return of the deceased person. When figuring gain or loss on the sale of assets that belonged to a deceased person, basis is stepped up to the fair market value of the asset on the date of death.
Federal estate tax is assessed when the value of the decedent’s gross estate, plus the exemption and taxable gifts, exceeds a certain value. For 2022, federal estate tax is a tax paid by the estate on values over $12,060,000. Some people use the term inheritance tax when they are really talking about the estate tax.
A decedent’s estate may have income, deductions, gains or losses to report on the estate’s Form 1041. Some people use the term fiduciary tax when they are talking about estate and trust income tax. If the estate receives income in respect of a decedent, which means income the decedent was owed before death but which was not paid until after death, the income should be included on both the federal estate tax and the estate and trust income tax returns.
2- You downsize and sell your belongings in an estate sale
Say you are retiring and decide to hold an estate sale… Should you pay taxes on your gains? The answer is “yes.” The person who owns the items is responsible for the tax.
The tax you pay is the same as estate sales of inherited property. You incur a capital gain if the item increased in value. The difference here is that there is no step-up in basis so if the value increased, the owner could pay more tax than the beneficiary.
A loss in market value is a non-deductible personal loss. Keep in mind that many used items (clothes, furniture, and other items) have a lower fair market value when they are sold than when they were purchased.
What if you donate the property you didn’t sell in an estate sale?
Say you didn’t sell some of the tangible personal property you intended to sell at the sale, and you want to donate the remainder of them to a qualified charity. In this case, you could claim a charitable tax deduction. Read up on the tax rules regarding charitable donations.
What happens if you give away the property?
As a beneficiary or original owner or an item, if you give away inherited property to a family member or friend, you generally don’t have to pay gift taxes, but you might have to file a gift tax return. You don’t get a tax deduction from it.
What about sales tax on estate sales?
Do buyers also pay sales tax on estate sales? Your answer is a case-by-case answer, depending on the state you reside in. Defer to your state revenue department for more information about state sales tax. Also, if you utilize an estate sale professional, they may handle this aspect of the sale.
What if you inherited some things, but you want to sell them?
As a beneficiary, if you sell items you’ve inherited, there are specific tax guidelines to follow. While you may think you could be subject to gift tax, this is not the case. Read on as we elaborate.
Capital gains on inherited property sold
If you sell items you inherited, you might have to pay taxes. If the inherited property is sold, you could be subject to capital gains tax if it is sold for more than its fair market value on the date of the deceased person’s death. In general, your basis in inherited property is step up basis which is its fair market value on the date of death. (Note that in many instances, the estate sale takes place shortly after death and there is no change in the fair market value of property.)
Although capital gains tax rates are usually variable based on the length of time you’ve owned the good, for inherited property the long-term capital gain tax rate applies regardless of when you inherited the item.
How to determine capital gains on your taxes for inherited property
In most cases, you’ll use your inherited basis and sale information to complete Form 8949, so you can report your gains and losses on Schedule D.
Sale of inherited property at a loss
If you sold the inherited property for less than its fair market value on the deceased person’s date of death, you could incur a capital loss. This occurs when you sell a capital asset (a piece of property) for less than what it was worth when you inherited it.
As explained under the capital gains section, there usually isn’t much change in the value of the property when it’s sold in an estate sale shortly after death. If property is sold for less than the value on the date of death, it’s generally a non-deductible personal loss.
More tax help with estate sale tax
If you still have tax questions related to your estate sale, let H&R Block help. Our tax professionals know the ins and outs of taxes and are dedicated to making sure you’ve filed with accuracy, so you get the biggest refund possible – guaranteed.
Make an appointment with one of our tax pros today.
Or if you prefer to file on your own, H&R Block Premium can help you file your taxes and calculate your capital gains taxes.
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