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5 Strategies to Help Your Clients Minimize Capital Gains Tax on Inherited Property

by | Sep 1, 2023

As a realtor working with clients who are navigating the sale of inherited properties, it’s crucial to provide them with expert guidance on how to minimize or potentially avoid capital gains tax. Understanding the tax implications and exploring the available strategies can greatly benefit your clients and help them make informed decisions. Here are five effective strategies that can help your clients reduce their capital gains tax liability on inherited property!

Leverage the Stepped-Up Basis:

One of the most significant advantages of inheriting property is the stepped-up basis. When your clients inherit property, the cost basis may be adjusted to its fair market value at the time of the previous owner’s death. This adjustment can substantially lower the potential capital gains tax liability when the property is eventually sold. Educate your clients about this valuable benefit and emphasize the importance of obtaining a professional appraisal to establish the property’s fair market value.

Explore Primary Residence Exemptions:

In certain jurisdictions, your clients may qualify for tax exemptions or exclusions if they choose to move into the inherited property and use it as their primary residence for a specific period. By meeting the residency requirements, your clients may be eligible for tax benefits when selling the property. Advise them to consult with a tax professional to understand the specific rules and timeframes applicable in their area.

Consider Tax-Exempt Transfers:

Encourage your clients to explore the option of transferring the inherited property to a tax-exempt organization, such as a charitable foundation or nonprofit. Depending on the jurisdiction, this type of transfer can potentially help your clients avoid capital gains tax altogether. However, it’s crucial to thoroughly research the tax laws and requirements associated with these transfers and recommend seeking guidance from a qualified tax advisor.

Timing is Key:

Help your clients understand the potential tax advantages of timing the sale strategically. Capital gains tax rates often differ based on the duration of property ownership. If your clients hold onto the inherited property for an extended period, they may qualify for long-term capital gains rates, which are typically lower than short-term rates. Encourage them to consult with a tax professional to determine the optimal timing for selling the property and maximizing their tax benefits.

Identify Applicable Exclusions and Deductions:

Every jurisdiction has its own set of tax laws and regulations. Therefore, it’s crucial to research and identify any applicable exclusions or deductions that your clients might be eligible for when selling inherited property. For example, there may be exclusions or deductions available for properties affected by specific circumstances like natural disasters or if the property was previously used as their primary residence. Empower your clients with this knowledge, but remind them to consult with a tax advisor for personalized advice based on their unique situation.

When working with clients who’ve inherited property, you’ll often find that situations require your expertise to extend beyond the realm of real estate. By understanding the potential tax implications and providing strategic guidance, you can help your clients minimize their capital gains tax liability. Remember to emphasize the importance of consulting with qualified tax professionals to ensure accurate advice tailored to their specific circumstances. By offering valuable insights and support, you will establish yourself as a trusted resource and advocate for your clients’ financial success!

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