Loans have nothing to do with your gains or cost basis.
In the simplest case, you bought the home for $179K.
- When you gifted half the home to your father, you gifted half your cost basis, or $89,500.
- When your father died, you inherited his half the house with a stepped up basis equal to the fair market value on the day he died. You do not give this figure, if you want to know, you will need to ask a real estate professional for a retroactive market analysis or appraisal. Let's assume the value was $350,000, so you inherited a basis of $175,000.
- Your adjusted cost basis is now $89,500 plus $175,000 = $264,500.
- Repairs do not increase the cost basis, but improvements do. An improvement raises the value of the home or extends the life of its home or one of it's subsystems, like a furnace or roof. Repairs, that restore the property to as-was condition, are not improvements and do not raise your cost basis. Let's assume $10,000 of repairs and $10,000 of improvements.
- That would make your adjusted cost basis on the date of sale to be $274,500.
- You can include some of your closing costs in your adjusted basis, but not all of them. Eligible costs are described in publication 523. https://www.irs.gov/forms-pubs/about-publication-523
- Your gain is the difference between the selling price and the adjusted basis.
Also note that this may all be needless. If you were overseas on government service (military, intelligence, or foreign service) you can suspend the 5 year residency rule. You may be able to exclude the first $250,000 of your gain from any tax since this was your main home for two years before you sold it, even if it was longer than 5 years ago. The rules for suspending the 5 year period are also in publication 523.
If you qualify to suspend the holding period and you qualify for the gain exclusion, you don't even have to include the sale on your tax return unless you received a 1099-S form at the closing. If you got the 1099-S, you must report the sale even if you qualify for the exclusion, the form will show no tax owed. If you were transferred overseas for a private company, this does not apply and your gain is taxable.
