A few questions. First, what state are you in? What state was the deceased a resident? There are a number of factors here to consider. Are you talking about state inheritance tax as opposed to federal estate tax? (I am a PA licensed attorney.)
Ok...reread the post. The inheritance was real property. You had to sell it to pay the tax. When you inherit assets, such as real estate, you get a stepped up basis. That means that for capital gains tax purposes, your tax basis is the market value at the time of Death. The rub here is that it is the market value reported by the executor. In PA, the executor would have to file an inventory and state a value on which the inheritance tax would be based. Let’s say the property was worth $100,000. If you were a direct descendent (child, grandchild, etc.) the tax would be 4.5% or $4,500. If you were a niece or nephew, the rate goes up to 15%. If the value of the property was correct, and you sold the property for $100,000, then there would be no gain. However, if the value was under reported, and you sell it for $200,000, it’s real FMV, then you would have to pay cap gains tax on the $100,000 difference. In either event, we get to your real question; are the sale proceeds “income” subject to income tax. The answer is no. The only tax the sale would be subject to is capital gains.
State inheritance tax, no federal inheritance tax.
Was not a large estate. 1 farm, 1 house, some stocks. But the farm and stocks were sizeable because of the skyrocketing land prices here over the last few years and the stocks were at an almost all-time high for that company. So the perceived value is high although the income from the farm is pretty small (barely pays expenses most years but it has been in family for almost a hundred years and we are going to keep it that way) and the stocks are only valuable if they are sold or held. Pays some dividends quarterly but not enough to retire on so I have to continue being a slave for a while. Will sell the house hopefully this year as being a remote landlord is not in my wheel house (150 miles away, but same state).
Had to sell some stocks. No capital gains on the sale because of the timing of the probate and then the sale they did not gain value in between. We were pretty sure with talking to our attorney and discussing it last year with our accountant we had it figured out but one still gets nervous when it gets near tax time and you’re thinking what ifs. And it seems like this took way more time and effort and expense than it really should have since it was so cut and dried we were the only heirs and trustees.
I think I have my answer.
Thanks for all the answers and concern.
I knew fellow FReepers could alleviate my worries. I can now do with a little less nerves until the tax man cometh.