Sale of a second house (not a rental) -- what is deductible

[ceenvee703]

My mother passed away and we sold her house. 11 years prior to the sale, she transferred the title to me and my sister, so it counts as the sale of a second house. We did not pay anything at that time. She did not pay rent to us.

I entered the 1099-S sale proceeds amount in TurboTax under Investment Income->Stocks, Mutual Funds, Bonds, Other. I believe that's the right place but can move it. (It was also sold in a different state so I've added both states to TurboTax)

My question is: can I subtract closing costs and repairs made by request of buyer from this amount? The closing cost categories were:

* Owner's Title Policy

* County Taxes for 2020

* Document Delivery fee

* Seller Closing Fee

* We also agreed to pay $1500 of buyer's closing fee

* wire transfer service

* real estate agent commission

We also had about $2K in requested repairs to electrical issues and for mold mitigation.

How much, if any, of these amounts can I subtract from the sale proceeds? Right now I'm assuming all of them, and I've put them in the "fees or expenses not already deducted from reported sales price" (divided by two of course since my sister and I split the proceeds as well as the fees.

Thanks very much.

[ColeenD3]

Not everything you pay at closing is deductible. 

Most expenses at closing on the purchase or refinance of a home are added to the cost of a home and are not deductible but are added to the cost basis of the home.  There are a few exceptions - the following would be deductible:

1. Interest paid at the time of purchase (the charge at closing would normally be done for interest up to the date of first payment.) This is sometimes included in the 1098 from the new lender.

2. Real estate taxes charged to you and not reimbursed by seller

3. Points or origination fees.  On a refinance they need to be amortized over the life of the loan unless the points were used to improve your main home.

4. Private mortgage insurance costs but, if prepaid, only the amount allocable to this year based on an 84 month amortization.

Title fees, real estate commissions, documentary stamps, credit report costs, costs of an abstract, transfer taxes, attorney fees, etc. are not deductible, but are added to the cost of the property.

*As the house was a gift, your basis is the her basis, that is her initial cost plus the cost of improvements.

[ceenvee703]

I'm sorry for taking so long to reply, but I do have a follow up question. 

Maybe my use of the word "deductible" was incorrect.

To calculate the amount of capital gains from the sale of the house, I would take the basis of my mother's house (the price she bought it for in 2009, she made no significant improvements that I have records for), and then calculate the net selling price (actual selling price in 2020 minus sales closing costs paid by me), and the capital gain would be the net selling price minus the original purchase price. Is that correct?

Source: https://www.fool.com/millionacres/taxes/capital-gains/will-you-pay-capital-gains-taxes-second-home-s...

[MaryK4 · Accepted solution]

Yes, your gain will be the Gross Proceeds received less Basis your mother had land selling costs. (or net selling price less basis)

@ceenvee703

[AmeliesUncle]

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@ceenvee703 wrote:

My mother passed away and we sold her house. 11 years prior to the sale, she transferred the title to me and my sister, so it counts as the sale of a second house. We did not pay anything at that time. She did not pay rent to us.

...

To calculate the amount of capital gains from the sale of the house, I would take the basis of my mother's house (the price she bought it for in 2009

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Did she continue to live there and pay all expenses?  If so, it seems likely that there is an implied "Life Estate".  If that is the case, then the Basis is the Fair Market Value on the date of her death.

You may want to consult a tax professional and/or Estate attorney about the potential Life Estate.

[ceenvee703]

Interesting. She did live there after transferring title to us, and paid all expenses (utilities, property taxes, etc.). 

Thanks for the info, I'll see what I can find out about that.

[MaryM428]

When you inherit property after the owner dies you automatically receive a "stepped-up basis." This means that the home's cost for tax purposes is not what the now-deceased prior owner paid for it. Instead, its basis is its fair market value at the date of the prior owner's death.

To that figure you add the cost of any improvements and repairs, cost of sale, and othen expenses you have incurred since inheriting and selling the home.

You may owe capital gains tax on the sale of the home.