One further note. I assume that the back due property taxes will be deducted from the sales proceeds. This is not a deductible expense to you, nor does it reduce the sales proceeds, allowing you to claim a smaller capital gain or a capital loss. You would be allowed to deduct on your tax return, only the property taxes that apply to the period of time when you owned the home, between your father’s death and the sale of the house.
You received a stepped up basis when your father passed, your adjusted cost basis in the home is the fair market value of the home on the date he died. You may want to secure a real estate appraisal to prove this in case of audit. When you sell the home, you can deduct certain selling expenses, (such as real estate transfer taxes and the commission) from the proceeds, but you can’t deduct these past due taxes. Assuming the real estate market doesn’t change two months too much in the short time between your father‘s passing and selling the house, you will likely sell the house very close to its fair market value, so that once you subtract the sales commission, you might even have a slight loss. If you treat this as a personal home, the loss is not deductible, but if you treat it as investment property, the loss is tax deductible.
