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Do I Owe PA Inheritance Tax on Mom’s house transfer?

Posted on Tue Jan 20, 2015, on Probate and Estate Administration

From our “Ask a Question” Mailbag: Pennsylvania Inheritance Tax and Real Estate Transfers

Most Recently Updated July 8, 2018.

“My Mother transferred her Bucks County home to me two years ago. She recently died. I am going to sell the house soon, but do I have to pay Pennsylvania Inheritance Tax?”

How to Keep the family home in the family

Pennsylvania Inheritance Tax and Real Estate Transfers

Pennsylvania Inheritance Tax and Real Estate Transfers

Not in your case. The Pennsylvania Inheritance Tax of 4.5% applies to transfers to children at death and includes all gifts made within one year of the date of death. If the house was transferred properly into your name 2 years ago, it will not be subject to the Pennsylvania Inheritance Tax.

That being said, it will also not receive a Step-Up in basis. When a person dies, the basis that the heir receives in inherited property is the date-of-death fair market value.

Let’s look at an example here, with the math explained below.

In this case, let’s say the house was worth $250,000 at her death. If she had died owning the house and gave it to you through her will, you would have paid a 4.5% Inheritance Tax on the whole amount. However, when you sold the house at her death for $250,000 your basis would have been $250,000 and there would be no capital gains tax owed.

Because your mother gave you the house outright, two years prior, rather than leaving it to you in her will, you have Transfer Basis, meaning you have whatever basis she had in the house. If she paid $20,000 for the house this would mean that if you sell the house for $250,000 you have to pay capital gains taxes on $230,000. In that case, it would have been better to pay the 4.5% Inheritance Tax.

1) Taxes if Transferred at Death

  • Value of House = 250k
  • Mom’s Basis = 20k
  • Tax Owed = 250,000 x 4.5% = $11,250

2) Taxes if Transferred 2 Years Prior

  • Value of House = 250k
  • Mom’s Basis = 20k
  • Amount Subject to Capital Gains = 250,000 – 20,000 = $230,000
  • *Tax Owed (15%) = 230,000 x 15% = $34,500
  • **Tax Owed (20%) = 230,000 x 20% = $46,000
  • This does not even include any PA Capital Gains tax (3.07%) that might be owed!

* Capital gains rate is dependent on regular income tax rate. For 2015, 15% is for those earning ordinary income from ($37,450 to $411,500 per year). 20% rate is for those earning over $413,200 per year. As you can see, transferring property prior to death creates a larger tax burden in this hypothetical.

More Probate Questions?

Pennsylvania Inheritance Tax and Real Estate Transfers is only part of the overall probate process. By all means, if you wish to learn more, please read my more detailed article, The Probate Process All You Need to Know.

In Conclusion: Pennsylvania Inheritance Tax and Real Estate Transfers

I hope that this article was helpful in explaining Pennsylvania Inheritance Tax and Real Estate Transfers. Further, I included links to even more detailed information on my website. Therefore, please contact me and let me know how I did. Certainly, your comments and questions are welcome!

Let our Probate Lawyers help walk you through what can be a confusing process. To begin with, call to speak to one of our experienced Probate Attorneys.  By all means, our lawyers are ready to answer your questions. In fact, feel free to contact our office for a free consultation. Ultimately our goal is to make the process as painless as possible!

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Avoiding Probate, Bucks County, Inheritance Tax, Pennsylvania, Pennsylvania Inheritance Tax rates, Probate Attorney, Probate Lawyer

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