Received a 1099S for property I sold that was acquired thru a quit claim deed when my sister passed away. The 1040 asks for the cost basis. How is this determined?

[JMV48]

I received a 1099S for property that I acquired thru a quit claim deed, when my sister passed away. The form 1040 seeks a cost basis for determining a taxable event. How is this determined?

[ColeenD3 · Accepted solution]

If it was done at the time of death, then it is an inheritance and your basis is her Fair Market Value of the property at the time of death. If you were deeded the property before she died, then it is a gift, and your basis is the lower of the basis or the FMV. Since the property has probably appreciated, her basis (cost plus improvements) is your basis.

@JMV48

[Carl]

How is this determined?

It depends on when the quit-claim deed was completed. If completed prior to her passing, then it's a gift. That means you get "EVERYTHING" at it's original cost basis. That cost basis would be what your sister paid for the property originally, and that includes the cost of any property improvements your sister may have paid for during her period of ownership. 

You also are gifted all prior depreciation already taken by her. That means when you sell the property, you have to recapture that depreciation and pay taxes on it. That recaptured depreciation is added to your AGI and has the potential to bump you into the next higher tax bracket.

Additionally, you also get all of her carry over losses (as shown on her IRS Form 8582)  which can help reduce your taxable gain on the sale of the property.

If you were titled the property after her passing, then it's not a gift. It's an inheritance. Your cost basis is whatever the FMV of the property was on the date of her passing - not the date it was titled to you. You also do *NOT* get her carry over losses *or* her prior depreciation. It starts all over for you from square one on everything.

If *you* did not rent the property and there was not a renter in the property at the time of the sale, then you'll report this in the "sale of home (gain or loss)" section and make sure you indicate it was inherited. Otherwise, you'll be taxed at the higher short-term capital gains tax rate.

If you did rent the property or if there was a renter in the property when it was titled to you, then you'll report the sale in the Rental & Royalty Income (SCH E) section of the program. Again, make sure to indicate that your acquisition of the property was through inheritance. Otherwise, you'll be taxed at that higher rate on your gain.

If you actually inherited the property and it was not a gift, and you need assistance with determining it's FMV, then so long as the sale price isn't to far outside the range of "normal" for like-kind properties in the same area, then use the sale price as your cost basis. Shouldn't be an issue provided you sold the property in the same tax year it was inherited and titled to you.