If you have inherited a property in Florida, you may be wondering how capital gains tax on inherited property will affect your decision to sell or keep it. Capital gains tax is the tax you pay on the difference between the sale price and the basis of the property. The basis is usually the fair market value of the property at the time of the inheritance, or the value reported on the estate tax return.

In this article, we will explain how capital gains tax works for inherited properties in Florida, and what are the pros and cons of selling. This information is based on our experience with the buying and selling of real estate in Florida over several years (we are not accountants); it is advisable that you contact your CPA for specific guidance on your tax situation.

Capital gains tax rates for inherited properties

The capital gains tax rate you pay depends on your income tax bracket and how long you have owned the property. If you sell the property within one year of inheriting it, you will pay short-term capital gains tax, which is the same as your ordinary income tax rate. For 2023, the federal income tax rates range from 10% to 37%, depending on your taxable income.

If you sell the property after one year of owning it, you will pay long-term capital gains tax on inherited property, which is lower than your income tax rate. For 2023, the long-term capital gains tax rates are 0%, 15%, or 20%, depending on your taxable income and filing status. Additionally, you may have to pay a 3.8% net investment income tax if your modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married couples filing jointly.

Florida does not have a state income tax, so you will only pay federal capital gains tax on inherited property in Florida. However, if you live in another state and sell an inherited property in Florida, you may have to pay state income tax in your home state.

Pros and cons of selling inherited properties

Selling an inherited property in Florida can have both advantages and disadvantages, depending on your personal and financial situation. Here are some of the pros and cons to consider:

Pros:

You can cash out the equity of the property and use it for other purposes, such as paying off debt, investing, or buying a new home.
You can avoid the hassle and expense of maintaining, repairing, or renting out the property.
You won’t have to worry about property taxes, insurance costs, and legal liabilities.

Cons:

You may have to deal with other heirs who have different opinions or expectations about selling the property.
You may have to pay a significant amount of capital gains tax on inherited property, especially if the property has appreciated a lot since the inheritance.
If you are ok dealing with tenants, toilets and termites, you may lose out on potential future appreciation or rental income from the property.

How to minimize capital gains tax on inherited property

If you decide to sell an inherited property in Florida, there are some strategies that can help you reduce your capital gains tax liability. Here are some of them:

Sell the property as soon as possible after inheriting it. This way, you can minimize the difference between the sale price and the basis, which is the main factor that determines your capital gains tax. In many instances, you can sell a house in probate, even before the probate process is complete.
Move into the property for a few years. If you live in the inherited property as your main home for at least two years out of the five years before selling it, you can exclude up to $250,000 of capital gains from your income if you are single, or up to $500,000 if you are married filing jointly.
Deduct any selling expenses from your sale price. These include commissions, closing costs, legal fees, advertising fees, and other costs related to selling the property.
Deduct any improvements or repairs that add value or prolong the life of the property from your basis. These include additions, renovations, landscaping, roofing, plumbing, electrical work, and other major improvements. However, you cannot deduct routine maintenance or cosmetic changes that do not affect the value or function of the property.
Use a like-kind 1031 exchange if you plan to buy another investment property with the proceeds from selling the inherited property. A 1031 exchange allows you to defer paying capital gains tax by exchanging one property for another of equal or greater value within a specified time frame. However, this option is only available for investment properties, not personal residences.

Consult a CPA for professional advice

Selling an inherited property in Florida can be a complex and challenging process that involves many tax implications and legal issues. Therefore, it is advisable to consult a certified public accountant (CPA) who specializes in estate planning and taxation before making any decisions. A CPA can help you determine your basis, calculate your capital gains tax liability, explore your options for minimizing taxes, and prepare and file your tax returns.