Will we owe capital gains on selling an inherited house?

Question

A certain house is inherited by a brother and sister. At the time, they inherited the home it was worth $1,600,000. They lived in it together for several years ( at least 3 ) and then sold it for $2,000,000. That is, they each made $200,000. Will they owe any capital gains tax on the sale of the home?

Answer 1

I am assuming that at no time in this period of time was the property a rental property. I am also assuming that neither person was a part owner in the property before the house was inherited. I am also assuming that they moved into the house as their principal residence for more than 24 months.

When they inherited the house each was now a part owner of a property with a stepped up basis of $1,600,000. That means that if there is any gains to be taxed it will be measured from that $1,600,000 value.

Based on a sale price each person would only be responsible for a gain of $200,000. Because they lived in the house as their principal residence for more than 24 months they have an exemption of $250,000 each. That would mean that they would nor owe any tax.

Note: some expenses related to the sale of the home are included in the calculation of the gains. So they could sell the house for slightly more than $2,100,000, because those expanses would reduce their gains.