Inheriting land can feel like a windfall, but selling inherited land in Florida comes with its own set of complexities—particularly when it comes to taxes. While inherited property doesn’t automatically trigger taxes, selling it does involve certain tax obligations that you need to be aware of. Understanding these tax consequences will help you make informed decisions and minimize your financial liabilities.
In this comprehensive guide, we’ll explore four key things you should consider when selling inherited land in Florida, especially regarding the tax implications. By understanding these factors, you can navigate the process more smoothly and avoid costly surprises.
1. Capital Gains Tax on Inherited Property
One of the most significant tax consequences when selling inherited land is capital gains tax. Capital gains tax is applied to the profit you make from selling an asset, such as land. When you inherit property, the value of the land is typically based on the stepped-up basis—this is the fair market value of the property at the time of the original owner’s death, rather than the price the owner originally paid for it.
This “stepped-up basis” can be a significant benefit for those inheriting property. If the original owner bought the land decades ago for a low price, the value may have increased substantially over time. The stepped-up basis ensures that you only pay capital gains tax on the difference between the land’s market value at the time you inherited it and the sale price, rather than the difference between the original purchase price and the sale price.
For example:
- If the person who passed away bought the land for $50,000 but its market value at the time of their death was $200,000, you’ll only pay capital gains tax on any profit above $200,000 if you sell it for more.
However, if you hold onto the land for a period after inheriting it and its value increases, you’ll owe capital gains tax on the appreciation. Let’s say the market value was $200,000 when you inherited the land, but you sell it a year later for $250,000. You’d pay capital gains tax on the $50,000 profit.
Short-Term vs. Long-Term Capital Gains
- Short-term capital gains: If you sell the land within a year of inheriting it, the profit is taxed at your ordinary income tax rate.
- Long-term capital gains: If you sell the land after holding it for over a year, you’ll be taxed at the lower long-term capital gains rate, which can be as low as 0% or as high as 20%, depending on your income level.
Key Consideration:
- Stepped-up basis: Reduces your tax liability by adjusting the value of the property to its market value at the time of inheritance.
- Short-term vs. long-term gains: Hold the property for more than a year to benefit from lower long-term capital gains tax rates.
2. Estate Tax and Inheritance Tax
It’s essential to distinguish between estate tax, inheritance tax, and the taxes you’ll face when selling inherited property. Estate tax and inheritance tax are often confused, but they are different.
- Estate tax is a tax on the deceased person’s estate and is typically paid by the estate itself before any assets are transferred to heirs.
- Inheritance tax is a tax imposed on the heirs after they receive the inheritance. Florida does not impose an inheritance tax, but it’s important to be aware of your federal obligations.
Federal Estate Tax
The federal estate tax applies only to very large estates—currently, estates valued at more than $12.92 million per individual as of 2023. This means that most people inheriting land in Florida will not have to worry about federal estate tax.
For estates that do exceed the federal threshold, the estate tax will be paid by the estate before the land is passed to the heirs, so you won’t have to worry about paying this tax when selling the land. However, keep in mind that laws regarding estate tax thresholds can change, so it’s important to stay informed about current limits and consult a tax professional if necessary.
State Estate Taxes
While some states impose their own estate taxes, Florida does not have a state estate tax. This makes Florida a more favorable state for those inheriting property. However, if you inherited land from someone who lived in a different state, it’s possible that state’s estate tax laws could apply.
Key Consideration:
- No Florida inheritance tax: You won’t owe state taxes just for inheriting land in Florida.
- Federal estate tax: Only applies to large estates valued above $12.92 million (2023), so most inherited land will not be affected by this tax.
3. Property Taxes on Inherited Land
When you inherit land, you’ll also assume responsibility for property taxes. Even if you don’t plan to sell the land right away, you will still be responsible for paying the property taxes due each year. In Florida, property taxes can vary significantly based on the county and the property’s assessed value, which may change after the property is transferred to you.
Reassessment of Property Value
In Florida, when property changes ownership, the local property tax office may reassess the property’s value, which could result in higher property taxes if the land’s market value has increased since the last assessment. This is especially common with inherited land that has been in the family for a long time and hasn’t been reassessed in years.
Homestead Exemption
If the land you’ve inherited was used as a primary residence and qualified for Florida’s Homestead Exemption, that exemption will not carry over unless you also plan to live on the property. Homestead Exemption reduces the taxable value of the property, which lowers the property tax bill. However, if you sell the land or if it’s not used as a primary residence, you will lose that exemption.
Before selling inherited land, make sure to account for any property tax payments due, and be prepared for potential changes in the assessed value if it’s been reassessed. If you plan to hold onto the land before selling, you’ll need to budget for these ongoing property tax payments.
Key Consideration:
- Property reassessment: Be prepared for a potential increase in property taxes if the land is reassessed after inheritance.
- Homestead Exemption: If the land was previously exempt under the Homestead Exemption, you’ll lose that benefit unless you reside on the property.
4. Tax Deductions and Selling Expenses
When selling inherited land in Florida, certain tax deductions and selling expenses may help reduce your overall tax liability. These deductions can include costs associated with the sale, as well as improvements or repairs you’ve made to the property.
Selling Expenses
When you sell inherited land, you can deduct many of the costs associated with the sale from your taxable capital gains. These selling expenses might include:
- Real estate agent commissions
- Legal fees
- Title insurance
- Survey and appraisal fees
- Advertising and marketing costs
By deducting these expenses, you reduce the taxable capital gains on the sale, which can significantly lower your tax bill.
Improvements and Repairs
If you’ve made any improvements or repairs to the land since inheriting it, you may be able to add those costs to the property’s basis, which reduces your taxable gain. For example, if you made improvements such as clearing the land, adding fencing, or installing utilities, these costs can be added to the stepped-up basis of the land. This means you’ll owe capital gains tax on a smaller profit margin.
For instance, if you inherited land worth $200,000 and sold it for $300,000, you would owe capital gains tax on the $100,000 profit. However, if you spent $20,000 on improvements, you can add that amount to the basis, reducing the taxable gain to $80,000.
Key Consideration:
- Deduct selling expenses: Real estate commissions, legal fees, and other selling costs can be deducted from your taxable gains.
- Include improvements in the basis: If you’ve made improvements to the property, these costs can help lower your tax liability by reducing the taxable gain.
Conclusion
Selling inherited land in Florida comes with several important tax consequences, from capital gains taxes to property reassessment. Understanding the impact of stepped-up basis, the distinction between estate and inheritance taxes, and how to account for selling expenses and improvements can help you minimize your tax liabilities and maximize your profit from the sale.
If you’re considering selling inherited land and want expert guidance, FL Land Buyer can assist you throughout the process. We specialize in helping individuals sell inherited land quickly and efficiently while ensuring they navigate the tax complexities effectively. Contact us today to learn more about how we can help you sell your inherited land in Florida.