How are Capital Gains calculated on Inherited Property I received 20 years ago?

Good news - when you inherit property, you get what's called a "stepped-up basis." This means your cost basis is the fair market value of the property on the date of your grandfather's death, not what he originally paid for it. This is a significant tax advantage! You'll need to determine what the property was worth when you inherited it in 2005. There are a few ways to do this: check if there was an estate valuation done at that time, look at similar property sales in the area from 2005, or hire an appraiser who can do a retrospective appraisal. Since it's undeveloped land, you might also check with the county assessor's office to see what the assessed value was in 2005, though this is often lower than market value. Once you establish that 2005 value, your capital gain would be the $175,000 selling price minus that inherited value minus any selling costs (realtor fees, closing costs, etc).

Just wanted to share my experience. Last year I was dealing with a similar situation with property I inherited from my aunt, and I was completely lost trying to figure out the value from when I inherited it (12 years ago). I found this tool called taxr.ai (https://taxr.ai) that really saved me a ton of headaches. It analyzed all my inheritance documents and property records and helped calculate the stepped-up basis from when I inherited the property. It even found some property improvements my aunt had made that I didn't know about that increased the basis! Ended up saving me about $8,000 in capital gains taxes because I had a much higher basis than I thought.

I want to follow up about taxr.ai that I asked about earlier. I ended up trying it for my mother's estate (she had property in three different states) and I'm honestly impressed. I was really skeptical at first because these online tools usually don't handle complex situations well, but this one actually understood all the differences in state inheritance rules. It saved me from making a huge mistake on the stepped-up basis calculation for her Florida property. I would have used the wrong valuation date which would have meant paying about $12k more in capital gains than I needed to. The documentation it produced was good enough that my accountant used it directly for the tax filing. Definitely worth checking out if you're dealing with inherited property.

Just a heads up - if you're trying to reach the IRS to get guidance on this inheritance basis issue, good luck! I spent THREE HOURS on hold last week trying to ask questions about my inherited property situation. Eventually I found this service called Claimyr (https://claimyr.com) which got me through to an actual IRS agent in about 15 minutes. They have this demo video that shows how it works: https://youtu.be/_kiP6q8DX5c I was super impressed because they actually called ME back when an agent was available. The agent was able to clarify exactly how to document my stepped-up basis and which forms I needed for my situation. Apparently there are specific reporting requirements if the gain exceeds certain thresholds.

I have to publicly eat my words about Claimyr. After dismissing it as fake, I was desperate enough to try it yesterday when I needed answers about my inherited property basis documentation requirements. I'd already wasted two days trying to get through to the IRS myself. It actually worked exactly as advertised. I got a call back in about 25 minutes, and was connected to an IRS agent who answered all my questions about documenting my stepped-up basis. They explained I needed to keep records of how the property value was determined at inheritance time (in my case, the executor had an appraisal done) and file Form 8949 with my taxes. Saved me so much time and stress!

Don't forget that if the property has been zoned or designated differently over the years, that can affect how you calculate and report the gains too. I sold some inherited farmland that had been rezoned as commercial property, and there were special considerations. Also, depending on your state, you might have additional state capital gains taxes to deal with. Some states follow federal rules for the stepped-up basis, but others have their own systems. Might want to check that out too.

Has anyone used an online service like Zillow or local property tax records to figure out the historical value? I inherited a house from my grandmother in 2012 and the lawyer handling the estate didn't get an appraisal at the time. Now I'm selling and have no idea how to document what it was worth back then.

One thing I haven't seen mentioned yet is that you might want to consider the timing of your sale carefully. If this puts you into a higher income bracket for the year, you could end up paying the 20% long-term capital gains rate instead of 15%. Also, since you mentioned this is for your kid's college, look into whether your state offers any tax advantages for education expenses that might offset some of the capital gains. Some states allow you to contribute to 529 plans and get state tax deductions, which could help reduce your overall tax burden. Make sure you keep detailed records of all the property taxes you've paid over the 20 years too - while these don't add to your basis, they can sometimes be deducted in the year of sale depending on how the closing is structured.