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Are inheritance taxes required on a small estate?

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My wife's grandmother passed away in 2004. Aside from a few thousand dollars in her bank account, her estate consisted only of her house. Back in 1999, she had a will made, in which she named my mother-in-law and her sister as her beneciaries, 50/50 split. At that time, the house was put into all three of their names, with each owning a third of the house.

So the house is now about to be sold, with the sale price around $130,000. The 2 sisters will split it 50/50. But is their any type of inheritance tax or income tax in this situation? Someone from the closing company called and stated that since the grandmother owned 1/3 of the house at the time of her death, that taxes will have to be taken out of her share of the sale price. But if the will states that only the 2 sisters are getting the proceeds, does this make sense?

An attorney will be brought in to sort this out, but I was hoping to hear from others what they would expect in this situation.


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There are two potential taxes: income tax and estate tax that may apply.

Fed estate tax only due if the taxable estate of a decedent who died in 04 exceeds 1,500,000. There may be state estate or inheritance due in the 18 states that have such tax. Need to check with state tax authority.

Fed income tax is normally due when an inherited capital asset is sold at a profit by the heir, e.g., the increase over the cost basis. However capital assets owned by a decedent receive a stepped up basis to the FMV of the asset on the date of death. Only the increase in the FMV in excess of the fmv on the date of death value is subject to capital gains tax payable by the heirs.

If grandmother only owned 1/3 of the house then her interest for estate tax was 1/3 of the fmv at her death. The stepped up Fmv is subtracted from her $43,000 interest to determine the amount of captil gains tax due by whoever inherited her interest. If the two sisters share the mother's interst equally then each will have to pay 50% of the cap gains tax on the deceased's share in addition to the cap gains on their separate shares.

You should consult a tax advisor to determine if tax is due.


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