A: First of all, we are sorry for your loss.
There are several topics wrapped into your question. Let’s take the $250,000 home sale exclusion first. If you live in a home as your principal residence and lived in that home for two out of the last five years, you get to exclude from federal income taxes up to $250,000 of profit on that sale. If you’re married and are selling your primary residence, you get to exclude up to $500,000 in profits from the sale.
In other circumstances, you get to exclude less if you didn’t live in the home for two out of the last five years; but for most people, the two-out-of-the-last-five-years rule will allow them to exclude quite a bit of cash from taxation with the IRS.
In your letter, you mentioned that you recently sold your own home and, as you say, you qualified for the exclusion. You’ll be able to take the exclusion again once you have lived in your new home for at least two out of the last five years. So, let’s say you moved into your dad’s home after he died and lived there for two years as your primary residence. You’d be able to take the exclusion.
If you lived there for less than two years, you wouldn’t — with some exceptions. If, for example, you’re selling because you’re relocating because of employment changes, health issues, divorce or other unforeseen circumstances, you may be entitled to a partial exclusion. For more information on partial exclusions, take a look at the IRS website by searching Publication 523, “Selling Your Home.”
Here’s some good news: When it comes to the sale of your dad’s home, you’ll probably owe no tax on the proceeds from the sale. Here’s why: We’re going to assume that you inherited the home. While your dad may have purchased the home for a fraction of the $300,000 sales price, and while you didn’t say so explicitly in your letter, we’re going to assume you inherited the property from him. Under current tax law, you inherited the home at the property’s value at or around the time of the owner’s death. That means that if your dad’s home was worth about $300,000 when he died, you inherited the home at that value; and when you sell it you have no profit.
Also under current tax law, it’s likely that your dad’s estate owes no tax on the home, either. In 2018, when someone dies, their estate can exclude up to $5.6 million from federal estate taxes. So your dad’s estate wouldn’t owe federal taxes, either — unless he died with more than $5.6 million in his estate. Depending on the state in which you live, however, you may owe state estate tax or transfer taxes on the sale of the property.
For more information, please consult with an estate attorney or tax professional.
Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact them through her website, ThinkGlink.com.