Does a Person Pay Inheritance Tax When He Inherits His Parents' Home?

After an individual passes away, his property is typically passed on to his children through an inheritance. In some cases, the inheritance could cause tax issues for the recipient. Depending on the size of the estate and what state you live in, you could have to pay inheritance taxes on items you receive, including real estate.

Federal Estate Tax

One of the taxes you may have to deal with in this situation is the federal estate tax. The federal estate tax is a tax levied on the total value of an individual's estate when he dies. This tax is paid out before the assets are distributed to the beneficiaries of the estate. If the value of the estate is above the estate tax exemption, then the tax is incurred on the overage. This tax only affects the wealthiest percentage of the population.

State Inheritance Taxes

When you inherit a house from your parents, you may also have to deal with state inheritance taxes. A minority of states require this type of tax to be paid. The inheritance tax is a tax paid by the recipient property instead of being paid by the estate. In states that require this tax, you must pay based on the total amount of property you receive, including real estate and personal property.

Paying the Tax

When faced with inheritance and estate taxes, it may be difficult to come up with the money you owe. In some cases, you may need to sell some of the property before you can come up with the money you need for the debt. If you have to sell the house, you could have to pay capital gains taxes on the sale as well. You may also be able to set up an installment plan with the state to pay the taxes.

Preparing for Taxes in Advance

If the parent does not wish to burden his children with inheritance or estate taxes, he could take the necessary precautions to handle the taxes in advance. For example, some people purchase life insurance policies for the purpose of handling estate and inheritance taxes. The insurance policy names the beneficiary of the estate, and then the money is paid out after death. This money is then used to pay off the estate and inheritance taxes.