How do you figure out what a house is worth for inheritance tax?

From our “Ask a Question” mailbag: My mother died and left us her house. We got two appraisals, which were near the value listed for real estate taxes. Then, we received a cash offer for a higher amount. Do we pay taxes on the appraisal amount, or the amount we will now sell the house for?

You have an argument for both values, but be careful! The Pennsylvania Inheritance Tax is based on the value of the house on the date your mother died. So, you could argue that the appraised value is correct and that the house simply went up in value after her death. This would mean listing a smaller number on the Pennsylvania Inheritance Tax Return, which you would think means less tax.

Not necessarily so!

If you list the smaller amount, then you miss out on two tax reducing techniques. First, if you put the sale value, you also get to deduct the costs of the sale (transfer tax, realtor commission, etc.) so the sale value may become the same as the appraised value. Second, if you use the appraised value, then the cash sale at a higher price will create a profit—capital gains—on which you will pay capital gains tax. The capital gains taxes are 18 to 20 percent federal tax and 3.07 percent Pennsylvania tax. Combined, this could be a 23.07 percent tax on the profit verses a 4.5 percent inheritance tax. Run the numbers, but you will likely find that using the cash sale value will be the more wise (tax wise) choice.

If you have any other questions about probate or inheritance taxes, feel free to contact our office for a free consultation.