The Hidden Truth Behind Estate Sale Tax Implications

While you might be familiar with the estate tax — aka the federal taxes levied on estates before assets can pass on to beneficiaries (but only on estates worth over $13.61 million) — you might not be as aware of something known as estate sales tax (not to be confused with regular sales tax, which you don't have to pay in a few states). As a beneficiary of an estate, you might consider hosting an estate sale in order to sell off excess things, such as paintings, furniture, clothing, or other valuable goods. However, death isn't the only reason or way to host an estate sale in the U.S. In fact, the estate business is known to be driven by the four D's: downsizing, death, divorce, debt.

What separates estate sales from, say, a regular garage/yard sale is that they're typically run and managed by a liquidation professional. Julie Hall, the executive director of the American Society of Estate Liquidators, explained to MarketWatch that there are about 14,000 estate liquidators in the country. Even with a professional involved, though, managing an estate sale can still be confusing, disappointing, and downright frustrating. From items not being worth as much as you'd expect to fees associated with your liquidation professional (some report the average take for a liquidator is around 35%), focusing on the estate sale tax implications of the process can easily fall away in the face of other concerns. On that note, let's dive into what those implications are, and how they can change depending on what kind of estate sale you're looking to host.

A lot of the taxation for an estate sale comes down to who the goods are being sold on behalf of. In fact, determining this key question can have huge implications for how taxation works for the sale. If the sale is selling goods on behalf of an estate (more than likely of a deceased person), then the sale will factor into the income tax return of that specific estate. This can be especially important to know if you're selling goods as a way of paying off any outstanding debts that the estate might owe (you might be surprised to learn just how much debt sticks around even after someone dies).

It's also important to document the fair market value of the item as of the date of death so you can best report whether you had a gain or loss on the sale of each item at the estate sale. If you end up selling an item for less than its fair market value, you could incur a capital loss which generally ends up as a nondeductible personal loss. On the flip side, selling an item for more than the fair market value can affect your capital gains tax. Depending on the size of the estate, you might face estate or trust income tax, so it's important to report federal estate tax and income tax returns properly when holding a sale on behalf of an estate.

Whether retiring or facing an empty nest, it's not uncommon for people to choose to downsize. This can include moving to a smaller home or just reducing items like furniture or artwork. Keep in mind that, per the four D's, this decision to downside can also apply to situations of either divorce or debt. You might find that hosting an estate sale to help get yourself back on your feet can be a worthwhile approach. In any of these instances, the tax you'll end up paying for items sold is the same as estate sales of inherited property. (Speaking of which, do you pay taxes on inheritance?)

Let's now return to capital gains tax and estate sales. Again, selling an item for more than its value when you purchase it, or selling an inherited item for more than its attributed value at the time of the deceased person's death, can lead to capital gains tax. Yet, calculating your capital gains tax can be tricky.

While capital gains tax rates are (most often) a combination of the length of time you owned the item (aka the holding period) with your level of taxable income, inherited property is instead subject to the long-term capital gain tax rate. This rate applies regardless of when exactly you inherited the item in question. Instead, the rate is determined by your filing status and taxable income in relation to three specific income cut-off points outlined by the IRS. (As of 2023 the tax rate on most net capital gain is no higher than 15% for most individuals.)