Question

In 1948, Janet bought a home for $52,000. She lived there until she died in 2018. When she died her home had a fair market value of $4.8 million. She also had $100,000 in a tax-deductible IRA account. Janet named you in her will as her sole heir and beneficiary.

In 2018, how will you treat the deductible IRA account that you receive from Janet? On these facts will Janet's estate pay tax on it? On these facts, will you pay income tax on it (and, if so, when)?

Answer 1

Tax Deductible IRA account:

If you are the spouse of Janet then you have 2 options.

1. Either you can remain a named beneficiary and add the assets to your existing retirement account. you can either retitle the IRA account so that you become the owner of the account instead of your deceased spouse or transfer the funds to your already existing IRA account. If you transfer the distribution to your account within 60 days of Janet's death, you wont be taxed and the $100,000 will grow tax deferred in your account as if it was yours from the beginning.
2. If you are below 59 1/2 of age and you are transferring the amount to your retirement account then then if you withdraw money from it before you turn 59 1/2 then you will have to pay 10% early withdrawal penalty + income tax on the amount withdrawn. so to avoid penalty it is better to remain named beneficiary then you will treated like inheriting children / other beneficiary and you wont be charged penalty. But you have to pay Income tax whenever you withdraw money from the account.

If you are not the spouse of Janet:

If you are not the spouse of Janet then you wont able to transfer the funds into your exisitng IRA account instead you have to create an new IRA account and transfer the funds to it and you can make contributions to this new account. But it is compulsory that you take Minimum distribution from this account from December 2019. Even if you are below 59 1/2 years of age you wont be charged early withdrawal penalty but you have to pay taxes at the time of withdrawal.

Janet's house:

Janet's house is inherited to you. You will have to pay taxes on it when you sell the house. you need to pay tax on Capital gain ( if any) and deduct if any capital losses subject to certain conditions.

To find out whether it is capital gain / loss you need to deduct the tax basis value of the cost of the house from the sale value. For the Original owner (i.e) it would have been the cost of purchase $52,000. But that basis value will not be applicable for you. the Basis value of the house is the Fair Market value of the house at the time of inheritance. So it is 4.8 million.

You have to pay taxes on the capital gain , if any at the time of sale of the inherited house and the Basis value of the house for you is 4.8 million. so if you sell the house above 4.8 million then you have to pay tax on the gain.