I have been managing a rental that both my father and I have own (63.87% and 36.13% respectively) since 2008 for a purchase price of $192,700. My father passed 12/24/23 and I and my two sisters inherited his portion (deed transfer sometime after probate in March 2024) divided 33.13%/ 15.37%/ 15.37% respectively. The FMV at the time of inheritance was $500k. We are looking at selling next spring 2025 (tax & current market reasons) and, due to housing prices going down a bit since 12/24/23, our net will probably be less than the inherited FMV.
What I’m trying to figure out is the tax impacts of a sale for each of us. Specifically how to determine basis and capital gains/loss. These are my initial thoughts:
- There are basically two separate basis calculations. One for me based on my original 36.13% investment and the other for each of us based on the inherited FMV of our inherited portions.
- I would have capital gains on my initial investment.
- I and my sisters would have a capital loss on the portion we inherited (presuming sales price less sales costs are less than the inherited FMV.)
- Also, regarding depreciation recapture. I’m presuming I’ll have some on my original investment, but on the inherited portion none of us will have any depreciation recapture.
- Also, we are making about $15k in capital improvements to the house this Fall (new flooring, windows & updated bathrooms), in anticipation of the Spring 2025 sale. The house was still rented Jan-March 2024, but we have not rented it since. So we’ll need to report the income/expenses on our 2024 tax returns. But do we need to capitalize and depreciate the improvements made in 2024 on the rental return, or would they just become an addition to the basis upon the sale in 2025?
- How would I in particular present/report the sale of the rental in 2025? Do I just combine my original basis and my share of the stepped up basis and net that against my portion of the overall sale proceeds?
Thanks!
