Inherited Property

[Aussie]

I have several questions regarding inherited property:
1) I have appraisal of a townhome which will be used as cost basis as of date of death. This was rental property which I am now choosing to sell in 2023 vs keep renting and was vacant when my father passed away so I never rented myself. My father passed in 8/2022 and property was transferred to me in 11/2022. I made improvements to the property in 2023 before listing for sale in 2023 (new carpeting, replaced shower fixture in bathroom, and misc minor repairs/painting where my husband & I performed the labor ourselves. Can I add the costs of improvements regardless of value to my cost basis (adjusted cost basis)? Can I calculate my labor cost and add to cost basis? If so what is acceptable calculation for my labor cost?
2) When I sell the townhome in 2023 I will report on my 2023 tax return. How will I treat the closing costs I incur when I am calculating the capital gain or loss? I am using a realtor so the closing costs will include commission as well as various fees, property tax, doc stamps, etc. Also, how do I treat the monthly expenses I incur such as utilities and HOA fees until the property is sold?
3) For 2022 the property was rented Jan through April 2022. The tenant passed away and smoked in the townhome. Therefore, the townhome could not be rented again without major cleaning and repairs. The intention was to get the townhome in condition to rent again, however that never happened before my father passed away in early August. I will be filing final tax return for my father which will include the rental income. How many months can he reflect the townhome as rental property? Not sure what the stipulations are around months where property is not rented due to repairs needed?
4) The townhome was transferred to me in November 2022 and still needed major cleaning & repairs to either rent or sell and was vacant. How do I treat this property on my 2022 tax return? I did not make any income on the property in 2022 but incurred expenses such as annual property tax, HOA fees, and utilities in 2022. I made no improvements in 2022. I made decision in January 2023 to sell vs keep as rental property.
5) My father's homestead property remained deeded in his trust for all of 2022. Even though he passed in August can I still deduct the property taxes that were paid in November 2022 on his 2022 tax return?
6) My father's homestead property will be transferred to me in 2023 and remains vacant. It will take me some time to go through all the belongings and decide what to do with the property. How will I treat the property on my 2023 tax return and the expenses associated with it such as insurance, property taxes, utilities, repairs, etc.?

[M-MTax]

you should get a tax pro to help you with all of this because it's not something you can deal with on your own. But if the homestead property is in trust it should be conveyed to you ASAP so you can deduct expenses like property taxes or else the trust has to pay the tax. Either way the tax paid does not get deducted on your father's final return.

[DianeW777]

The questions will be answered as you asked them.

1. Can I add the costs of improvements regardless of value to my cost basis (adjusted cost basis)? Can I calculate my labor cost and add to cost basis? If so what is acceptable calculation for my labor cost?
   • Yes, any capital improvements (with more than a one year life) can be added to the inherited value.  Other expenses will be selling expenses. Unfortunately, the IRS and Congress believe your labor is worthless in this situation. You can add nothing for your labor.
2. How will I treat the closing costs I incur when I am calculating the capital gain or loss? I am using a realtor so the closing costs will include commission as well as various fees, property tax, doc stamps, etc. Also, how do I treat the monthly expenses I incur such as utilities and HOA fees until the property is sold?
   • Sales commissions, other closing costs mentioned will be part of your sales expenses at the time of sale.  The expenses for utilities, other upkeep expenses and the HOA fees are personal expenses and are not allowed to be used as a deduction.
3. How many months can he reflect the townhome as rental property? Not sure what the stipulations are around months where property is not rented due to repairs needed?
   • The townhome will be rental property on your father's final return until death even though it was temporarily vacant while repairs were being done until his death. On the date of death the property is no longer reported as a rental on his return.  If the property was temporarily vacant while repairs were being completed it could be considered as a rental on your return until it was sold if you had the intent to rent and it was advertised as such during the repair period. If not, then it will not be a rental on your return and it will be a sale of inherited property in 2023.
4. Answered in number 3. above.
5. My father's homestead property remained deeded in his trust for all of 2022. Even though he passed in August can I still deduct the property taxes that were paid in November 2022 on his 2022 tax return?
   • No.  The property taxes paid in 2022 after his death cannot be used as an expense on his final return.  They can be used on the estate return or on the return of the beneficiary as a second home.
6. My father's homestead property will be transferred to me in 2023 and remains vacant. It will take me some time to go through all the belongings and decide what to do with the property. How will I treat the property on my 2023 tax return and the expenses associated with it such as insurance, property taxes, utilities, repairs, etc.?
   • If I assume this is a separate property from the rental, it is personal expense to you for any miscellaneous repairs, utilities, insurance and any necessary upkeep expenses.  For any capital improvements (more than a one year expected life) you will add to the inherited value of the home and increase your cost basis for the sale.  This limits the capital gain on the future sale.  Likewise you will use selling expenses, commissions and other closing costs at the time of the sale. 

@Aussie 

[Aussie]

Thank you for the informative response!  I do have follow up questions;

In your reply to first question you state "Yes, any capital improvements (with more than a one year life) can be added to the inherited value.  Other expenses will be selling expenses. "

To clarify what is considered a capital improvement, is there a dollar value also associated with the definition? For example, I paid plumber $200 to install shower/tub fixture which included part & labor. This fixture is expected to last more than a year so even though relatively low value is this still considered capital improvement or is this selling expense. I also replaced several A/C vents that fall into this same category.  I also incurred expenses for mitigation of cigarette smoke smell (purchased products from janitorial store) which I assume could be considered selling expenses, is this correct?  Is it correct to classify non capital improvement items as selling expenses if the purpose was to get the townhome in condition to put on market for sale?  I understand the typical maintenance/monthly expenses cannot be deducted such as the HOA fees, monthly utilities, & insurance.

Also, to clarify answer to my question #4 regarding how to treat the inherited townhome for 2022 on my tax return - I never advertised for sale or for rent in 2022 as it was in no condition to rent or sell.  I started looking into what would need to be done to get ready to rent but was not able to complete in 2022. I completed repairs in 2023 and then made decision to sell vs rent.  So since this was vacant the rest of 2022, do I need to treat as 2nd property or is there validity to treating as rental even though it was never rented for the remaining 4 months of 2022?

Thank You

[MarilynG1]

The repairs you mention would not be considered Capital Improvements, but could be considered Sales Expenses.  Replacing items with updated ones is considered a 'repair'.

Here's more info on Home Improvements. 

If the property was never advertised as a Rental, enter the sale in TurboTax as an Investment Sale. 

Here's details on Sale of Inherited Home. 

@Aussie 

[Aussie]

Thanks again for the clarifications.  

For 2022 the inherited rental property was not put on the market for sale. This was not done until 2023.

So for 2023 tax return it sounds like I reflect in turbotax as investment sale. But what about 2022 for the last 4 months of the year (my father passed in August 2022). How do I reflect this inherited rental property which was never rented due to needed repairs to get back in livable condition? The property was empty and no repairs were started until Jan 2023.

[SharonD007]

You do not need to report anything on your 2022 tax return since you did not rent the property out and the expenses that you incurred fixing it up will be included in your sales expenses as MarilynG1 indicated in her post above.

[Aussie]

I did pay the property tax for the townhome. Isn't that an allowable deduction?

[PattiF]

Yes, you would be able to add the property tax that you paid as a deduction for Schedule A on your 2022 tax return. 

Please see this TurboTax Help article about entering the property tax.

@Aussie 

[M-MTax]

Property tax is allowable as a deduction. You can't deduct repairs or add costs of same to your basis unless the property is used for business or the production of income.