Would the basis be what the property was worth in 1994, or 2013 when she passed away? I am the sole inheritor and haven't lived in the house for over 30 years. How do I report this on my taxes?
How **exactly** was the house titled between 1994 and 2013?
Was the house empty from 2013 until now? Why are you reporting it now? Did you sell it?
Yes, you owe some capital gains tax.
When you sell, you owe capital gains tax on the difference between the sales price and your adjusted cost basis. Assuming this was "Joint tenancy with right of survivorship" then what happened in 1993 is that your mother gave you a 50% share of the house. That 50% share comes with your mother's cost basis at the time. Not 50% of the value in 1993, but 50% of her basis. More on that later.
When she died you inherited the other 50% of the house and received a "stepped up" basis equal to 50% of the fair market value on the date of her death.
So what is your overall basis? Your overall basis is:
•50% of your mother's cost basis in 1994,
•plus 50% of the cost of permanent improvements made since 1994,
•plus 50% of the fair market value on the date of her death.
Your mother's cost basis in 1994 is the price she paid for the house. If she co-owned the house with a spouse who died before 1994, then she also received a partial stepped up basis at the time of his death. So your mother's cost basis might have been,
•50% of the original purchase price of the house,
•plus 50% of the cost of permanent improvements made before 1994,
•plus 50% of the fair market value on the date of her spouse's death (the co-owner's stepped up basis).
Your task is to get all the documents together that prove your basis. Original purchase price (will be in the county records), receipts for renovations and improvements, appraisal on the date of her spouse's death (to prove stepped up basis), appraisal on the date of her death (to prove your stepped up basis). A licensed appraiser should be able to give you a valid appraisal based on old records.
Because, if you are audited, the IRS will only give you the basis that you can prove. You can easily prove that your basis is 50% of the fair market value on the date of your mother's death with a current appraisal. The hard part will be proving that you have a larger basis as a result of the gift of the 50% share.
Because you did not live in the home, you owe capital gains tax when you sell based on the sales price and the highest adjusted basis that you can prove.
Thank you for the information and great answer. I didn't realize it was so complicated. I pay quarterly estimated tax: is this something I need to include in January's payment, or just on my return for 2016?
Depending on your income, you won't owe an underpayment penalty if your total payments into the system are more than 90%, or more than 110%, of last year's tax liability.
If you think the tax (15% of the gain) could be substantial, you will want to make sure your estimated payments add up to at least 110% of last year's tax liability. You could pay more, but that's the minimum to be safe from a penalty.
Documenting cost basis on a gift of a house like this is one of the reasons that simply giving a house to a child is considered poor estate planning. There were other ways to make sure you got the house (and could take care of it if your mother became ill) that might have cost more up front in attorney fees to set up, but would save you trouble and maybe taxes down the road.
Since you have to deal with the situation as it is, make the best effort you can to fairly document the basis, and hope you don't get audited.