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Opus 17 · ‎January 31, 2024

@mgawro01 wrote:

One last question on using 50% of my parents original cost basis. Can I add cost of any improvements to their original cost basis (new roof, HVAC, etc) or just have to use the amount they originally paid for the house?

Thanks

There's a lot going on here.

I'm going to ignore the issue of life estate for a moment and just think about cost basis, and try and clarify some things for you.

1. Your parent's cost basis as of the day before your mom died in 2008 is equal to the price they paid for the home plus any permanent improvements they made before her death. Also, some of their closing costs can be added to the basis. See publication 523 for a discussion of cost basis and also the difference between repairs and improvements. (For example, if they replaced the roof in 2005 and again in 2020, only the second one counts since it is still part of the house but the first one is gone.)

https://www.irs.gov/forms-pubs/about-publication-523

2. Then, when your mother died, your father received an adjusted cost basis for half the value of the home on the day your mom died. Basically, he keeps his half of the home at his original cost basis, and he inherits half the home at a cost basis equal to the fair market value in 2008. This is his new adjusted cost basis.

3. Then a few days or weeks later, your Dad puts you on the deed. You get half the house and half of his adjusted cost basis as of the date of the gift (his partially stepped-up basis).

4. Then, you and your Dad can add to your cost basis, the cost of improvements you made between 2008 and 2023. That will give you your adjusted cost basis on the day before your father died.

5. What happened when your father died is something I will leave to others to describe, because I'm sure I will get the nuance wrong. You may want to discuss your situation with a local tax professional or attorney.

In the worst case scenario, you inherited your father's half of the house using a stepped up basis equal to half the FMV on the date he died, which is added to your basis for the other half of the house. In the best case scenario, you inherited the entire house with a fully stepped-up basis. It might be easiest to write down a flow chart or timeline to figure your basis under the two different scenarios.

6. Next, you sell the house. You are the only owner, so we ignore the fact that you split the proceeds with other siblings. If there is any tax to be paid, you are fully responsible since you are the full owner, and if there is a deductible loss, it is only reported on your tax return.

-If you sold for $250K and had a fully stepped up basis, then you have a loss of $50K.
-If you had a partially stepped up basis, you may have a smaller loss or a gain.

Actually, your loss is a bit more because you can subtract the real estate commission and maybe some of your closing costs from the selling price.

If you never used the home as your personal residence, and considered it an investment that you were selling as soon as you inherited it, then any loss is tax deductible. However, if you used the home for personal purposes and it was personal property, you can't deduct a loss if you had one. The fact that you sold to your nephew does not change the deductibility of the loss because he is not closely enough related to affect things.

7. Last of all, you split the proceeds with your siblings. Because you were sole owner, this was a gift from you to them. (The fact that your dad asked in his Will for you to do this is treated as a suggestion or request. If it was all your house, then you made a personal gift.). If the amount of the gift was more than $17,000 per person, you should report it on a gift tax return form 709. Payment of gift tax is not owed unless your total lifetime gifts are more than $13million, but you must file the form so the IRS can keep track of your large gifts. This form is not included in Turbotax and is not e-filed, although the deadline is the same (April 15). Download a copy from the IRS web site, fill it out, and mail it to the address in the instructions.

https://www.irs.gov/forms-pubs/about-form-709

8. I think you probably received a fully stepped-up basis and not a partial step-up. But you may want a personal legal opinion.