I just sold a small inherited property and received a 1099 at closing - what are my tax obligations?

Wait I'm confused about this stepped-up basis thing. So if grandma bought the land for like $1000 thirty years ago, but it was worth $5000 when she died, the OP's basis is $5000 not $1000? And if it sold for $5800, they'd only pay tax on $800? That's a lot better than paying on the whole amount!

That's exactly right. When someone inherits property, they receive what's called a "stepped-up basis" to the fair market value on the date of death. So in your example, if grandma paid $1000 but it was worth $5000 when she passed away, the basis becomes $5000 for the person who inherited it. If they then sold it for $5800, they would only potentially owe capital gains tax on the $800 difference ($5800 - $5000). This is one of the significant tax advantages of inherited property versus gifted property. And since it was held for over a year after inheritance, it would be taxed at the more favorable long-term capital gains rates.

How accurate is this taxr.ai thing? I'm dealing with something similar but with stocks my dad left me, not property. Does it handle all kinds of inherited assets or just real estate?

I'm always skeptical of these online tools. Did it actually save you money compared to just using something like TurboTax or going to a professional? I mean, how complicated can a single property sale really be?

It handles all kinds of inherited assets including stocks! For inheritance situations, it asks specific questions about the asset type and acquisition date to determine correct basis calculations. I found it much more specialized for these situations than general tax software. For your skepticism - fair question. What made the difference for me was that it specifically prompted me to get documentation of the property value at time of inheritance, which established my higher basis. TurboTax just asked for my basis without explaining the whole stepped-up basis concept. The specialized guidance saved me about $900 in unnecessary capital gains taxes.

How does this actually work? Do they just call the IRS for you? Couldn't I just keep calling myself and eventually get through?

Yeah right. I'll believe the IRS actually provided helpful advice when pigs fly. Every time I've talked to them they just read from scripts and can't answer anything specific. I seriously doubt this service makes any difference.

They use a system that navigates the IRS phone tree and holds your place in line. When an agent is about to answer, you get a call connecting you directly. It's basically like having someone wait on hold for you, but using technology. You absolutely could keep calling yourself, but in my experience, waiting times have been 2+ hours lately if you even get through at all. I got disconnected twice after waiting more than an hour. With this, I just went about my day until they called me when an agent was ready. I was skeptical about IRS advice too, but for straightforward questions like basis calculation and quarterly payment requirements, they were actually helpful. The key was getting a real person rather than trying to find answers on their website.

Good point about state taxes! I didn't even think about that. I'm in Florida so I think we don't have state income tax, but is there anything else I should be looking for at the state level for property sales?

Florida is one of the better states for this situation since there's no state income tax, so you won't have to worry about state capital gains tax on the property sale. However, make sure all property taxes were properly prorated at closing and that you received credit for any taxes paid in advance. Also check that any documentary stamp taxes or transfer taxes required by Florida were properly handled at closing. These should all be clearly listed on your settlement statement, but it's worth verifying everything was done correctly.

Whether you need to make estimated quarterly tax payments depends on your overall tax situation, not just the property sale. Generally, you need to pay estimated taxes if you expect to owe $1,000 or more when you file your return AND your withholding and credits will cover less than 90% of your current year tax or 100% of last year's tax (110% if your income is over $150,000). For a small property sale of $5,800 with a stepped-up basis, the taxable gain might be small enough that it wouldn't trigger the estimated tax requirement, especially if you have enough withholding from other income sources.

Thanks for explaining that! So it really depends on my overall tax situation rather than just automatically needing to make a quarterly payment because I received a 1099. That makes sense. I'll look at how much I'm already having withheld from my regular job and see if it's likely to cover any additional tax from the sale.

Oh jeez that sounds stressful. What kind of documentation should I be keeping? I honestly don't think my grandmother ever had the property formally appraised when she died.

If you don't have a formal appraisal from the time of your grandmother's death, try to gather: 1. Property tax assessments from around the time she passed away (county tax assessor websites often have historical data) 2. Comparable sales data for similar properties in the area from that time period (a real estate agent might be able to help with this) 3. Any documentation about the property's condition at that time (photos, insurance documents, etc.) 4. Create a written explanation of how you determined the fair market value based on this information The key is having a reasonable basis for whatever value you claim as your stepped-up basis and being able to explain your methodology. Even if it's not perfect, showing you made a good-faith effort to determine the correct value goes a long way in case of questions later.