Capital Gains - Inherted Second Home (Cottage) 1099-S

[smirnoff]

My brother & I inherted a summer cottage from our parents (shack, no heat or water, access by boat only) about 10-years ago, the appraised value back then was $130k.  This year in August, I negotiated & sold my 50% share to my brother for $125k.  I have invested about $50k in improvements, along with recently purchasing a boat ($35k) to access the cottage since its located on its own island & only accessable by water.

I went through a title company in the sale, instead of a quick claim deed, to ensure payment, title/tax transfer, & the title was "clean".  I am guessing I will receive a 1099-S for the gross proceeds.

Since this cottage was "in our family", are there any favorable tax laws in regards to the capital gains?  How do I write-off the improvements & boat to access the cottage if I have to pay capital gains? My AGI in 2021 is under $100k.

[OmM1]

Hello smirnoff

Thank you for your question.

to calculate your capital gains, you are allowed to increase your basis by the cost of improvements you made to the property.

In view of the above your basis in property roughly will translate to

    65K (130K *your 50% share)

 +50K Improvements  (- sorry boat does not count towards basis of cottage. if you gave away the boat in the price the you can apportion the selling price between cottage and boat)

 Since you sold the cottage for 125K

You will be liable to pay taxes of the difference between net selling price of your share ( sale price less any expenses directly related to the sale) and your basis.

Hope this answers your question,

[mikafeed58]

The only "favorable tax law" in regard to the sale of inherited property is the "step up basis" (FMV at date of death) meaning that the inherited value is tax free. However, since you are selling to your sibling at a gain, you will have to pay Capital gains on the difference. You will be able to reduce those Capital Gains by major improvements (as you noted), but I do not believe you will be able to deduct to cost of the boat unless its sole purpose was to access the property which probably means it would have to be included in the sale.

Please look to this IRS link for further clarification:

https://www.irs.gov/faqs/interest-dividends-other-types-of-income/gifts-inheritances/gifts-inheritan...