What are the tax consequences of inheriting a house?

When children inherit a home, the Internal Revenue Service determines their basis in the property on the date of the benefactor's death. The cost basis is not the amount the owner originally paid for the house. It is the property's fair market value on the date of the benefactor's death, the IRS says. "Cost basis" is a tax term for the dollar amount assigned to a property at the time it is acquired, for the purpose of determining gain or loss when it is sold. Assume the property was divided up equally. If one of three siblings deemed to inherit the home sold her share, she must pay capital gains tax for whatever profit she made over one-third of the new basis. Other tax consequences include estate taxes. However, the estate must total $1.5 million or more in 2004 (up from $1 million in 2003) before tax issues become a concern. The IRS allows residents to pass on property, cash and other assets worth up to those totals before charging the heirs any taxes. On the transfer of ownership, quit claim deeds often are used between family members in situations such as this when an heir is buying out the other. All parties must be agreeable to dropping a name from the title.

Other resources: IRS Publication 950, Introduction to Estate and Gift Taxes. You can download it from the IRS Web site (www.irs.gov) or order by calling 1-800-TAX-FORM (829-3676).