Inherited house turned rental

My sister and I inherited my parents' paid-off house in Wilmington, NC, with no appraisal at time of death in 2017.  Sister was executor and maintains that the estate owned the home until it left probate in June 2019, from which time we co-owned it.  I worked on the house February and March 2020, and purchased her share of the home in March 2020 with a mortgage (my second -- I already have a primary mortgage) to acquire it as investment property (not primary residence).  My sister moved out of the home at that time (she had been living there rent-free).  Renters moved in the end of May 2020.  I have already paid for three appraisals on the house (one ordered by my sister as executor in February 2019, one in fall 2019 to qualify for mortgage, and a third in February to re-certify the results before closing). Do I have to pay for another, retroactive appraisal to get Fair Market Value on date of death? Or can I use the alternate valuation date that my sister as executor used? Do I list the mortgage interest and points as a second mortgage under deductions & credits, or under rental expenses? Also, do I need to issue 1099-NEC's for painting to get house ready for rent, etc.?  House would have been ready to rent in March if the pandemic had not hit, as I had to return home due to lockdowns and could not work on the house again until May. I probably lost rental income due to that, and had to pay mortgage payments out-of-pocket during that time.  Is there a tax break for that lost income potential, or do I have to list every day in 2020 until the renters moved in as personal-use days? Thank you!!!

ColeenD3
Expert Alumni

Investing

 Or can I use the alternate valuation date that my sister as executor used? Yes, it is close enough in time that not much would have changed.

 

Also, do I need to issue 1099-NEC's for painting to get house ready for rent, etc.?  As you are not a business but an individual, no. If your rental rises to the level of a business, then yes.

 

House would have been ready to rent in March/could not work on the house again until May. Which was it? If the house was ready and available for rent, why did you continue to work on it in May. Deductions start when the house is placed in service and available for rent. 


 Is there a tax break for that lost income?  There is no such thing as lost income. You can't lose what was never yours to begin with. 

 

or do I have to list every day in 2020 until the renters moved in as personal-use days? No, these are not personal use days unless your were living there. It is simply in a state of limbo until it is placed in service. At that point, even if you can't find a renter, expenses are deductible.

 

 

Investing

I am a retired US Treasury enrolled agent and a retired Master Tax Advisor for H&R Block.  My advice is for you to go get a CPA or enrolled agent to advise you on this.  You could be setting yourself up for a big tax bill when you sell this property if you don't get YOUR BASIS (cost, sort of) in this property establish before you roll along with all these changes like renting and rehabbing and expensing and buying out relatives.

 You may have already "sold" it as an heir when you bought your sister's half.

 

Also, you need to learn about being considered "in the real estate" business so that you can AVOID being treated as a passive investor in this property if at all possible.

 

I can guarantee you one thing. You will be glad you followed my advise.  It "costs" a lot of tax money to earn rent as a passive investor.

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