Inherited Rental Property that we sold

[Luna89Efrain]

My parents bought a house in 1990 for $40K.  They never lived in the home and used it solely for rental purposes.  The house was always rented out.  My oldest sister was put on the deed in case anything happened to my parents.  I was a minor, so I was never on the deed.  My mom passed away in 2016 and my dad passed away in 2018.  Before passing, my father said my sister and I both would inherit the house once he passed away.  Once my father passed away, my oldest sister became full owner of the house.  Since I was never on the deed, my sister is the one that managed the property.  The property was always rented out from 1990 up until Nov 2021.  Right before selling the house, my sister added me to the deed so that we could split the money from the sale.  I was added to the deed 3 months before the sale of the home.  My parents bought the house for $39K and we sold the house in 2022 for $420K.  I got form 1099-S with gross proceeds of $210K.  The amount was split evenly between the both of us.  The FMV back in 2018 was around $200K. Our parents did some improvements throughout the years totaling around $10K.  I am so confused on how I would report this on my tax returns.  I have done some research but still confused.  Would this home be considered long-term even though it was a rental? How do I go about reporting this income?  Would I use the date my father passed away as the date that I inherited the property or the date when my sister added me to the deed?  On what schedule do I report this income?

[MonikaK1]

More information is needed in order for you to be able to report this transaction correctly. I recommend that you seek legal advice.

When you inherit a home or a share of a home, the inheritance itself isn't taxable, but its subsequent sale is a taxable event unless you lived in the home and qualified for the primary residence exclusion. You would report your share of the gross proceeds of the sale as the selling price, and you would report your basis in the inherited home (typically the fair market value as of the date you inherited the property, normally the date of death) so that only the net gain is taxable.

Did either of your parents have wills or a trust? Just because you were told you would inherit the property doesn't mean that you inherited a share in it. You need to know when you acquired ownership in order to determine your basis in the property. 

The fact that the property was a rental creates the need for more information. Did your parents report the property as a rental on their tax return? Did your father's estate file Form 1041 reporting the rental?  

Did your sister report the property as a rental on her tax return? If you didn't inherit the property, did she gift you half-ownership? Generally, a taxpayer who acquires property by gift takes a basis in the property equal to the donor's adjusted basis in the property at the time of the gift (referred to as transferred or carryover basis).

Report the sale of an inherited home or home acquired by gift under Wages and Income. Scroll down the screen until you come to the section “Investment Income”

1. Choose “Stocks, Mutual Funds, Bonds, Other” and select “start’ or click "Add Investment" if you have already worked on this section
2. Continue. When you see a list of brokerages for import, click Enter a Different Way
3. The next screen has a list of investment types. Click on Other / 1099-S, which includes homes that are not your primary residence

For more information on these topics, please see this IRS FAQ, and this one, as well as this TurboTax tips article on tracking the basis of a property.

[Luna89Efrain]

No, my parents did not have wills or trusts.  I am assuming I acquired ownership once my sister added me to the deed.  My parents did report the property as a rental on their tax returns and so did my sister once my parent passed away.  She only added me to the deed 3 months prior to selling so that we could split the money from the home sale.  

[MonikaK1]

Again, I recommend that you obtain legal advice. 

If your parents died intestate and without a trust, any real properties owned should have gone through probate. Depending on the laws in the state, you could have been awarded a share of the property at that time, rather than shortly before the sale, and that would change the calculation of your basis in the property.

The basis of property inherited from a decedent is generally one of the following:

• The fair market value (FMV) of the property on the date of the decedent's death (whether or not the executor of the estate files an estate tax return (Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return)).
• The FMV of the property on the alternate valuation date, but only if the executor of the estate files an estate tax return (Form 706) and elects to use the alternate valuation on that return. See the Instructions for Form 706.

See this IRS FAQ for more information.

To determine your basis in property you received as a gift, you must know the property's adjusted basis to the donor just before it was given to you, its fair market value (FMV) at the time it was given to you, and the amount of any gift tax paid with respect to the gift.

If the FMV of the property at the time of the gift was less than the donor's adjusted basis, your basis for gain on its sale or other disposition is the same as the donor's adjusted basis, plus or minus any required adjustments to basis during the period you held the property.

A different rule applies if you sell gifted property at a loss. If the FMV of the property at the time of the gift was less than the donor's adjusted basis, your basis for loss on its sale or other disposition is its FMV at the time of the gift, plus or minus any required adjustments to basis during the period you held the property. In other words, for purposes of determining losses, you use the lesser of the donor's adjusted basis or the FMV at the time of the gift as your basis.

See this IRS webpage for more information on the basis of gifted property.