Sale of Gifted home

[Crossco46]

My wife was gifted a home with her sister. It was sold this past year and we received a 1099-s form for the sale of home. We then received a letter from sister saying she rented it in 2017till sold this past year. It was handwritten with our share of expenses and income and she sent a check for our share which we just got in March of 2020. How do I report this in turbo tax premiere? 

[Carl]

It was handwritten with our share of expenses and income and she sent a check for our share which we just got in March of 2020.

This concerns me, because it sounds to me like your sister is trying to "stick you" with depreciation recapture of depreciation you did not take 2017-2019 as required by law. You did not take depreciation on your percentage of ownership, becuase you did not know the other owner had converted the property to a rental. That means that in addition to paying taxes on your share of the sale price, you will also pay taxes on your share of recaptured depreciation, and will be fined for not having taken that depreciation 2017-2019 as required by law.

So if my assumptions are correct, you need to seek legal advice - and not just from a tax professional either. Overall, your sister who rented the property for three years without your consent or knowledge, should be the one required to recapture 100% of the depreciation and pay 100% of any tax assessed on that recaptured depreciation.  Please seek legal counsel, as it's going to be cheaper than the fines and penalties you could potentially pay otherwise.

[MarilynG1]

Since your wife and her sister each owned 50% of the home, when it was sold your wife would report her share as Sale of Inherited Property in the Investment section and enter the 1099-S.

She would need to determine what her Cost Basis in the property was, in order to report either a Gain or Loss.

Click this link for info on Calculating Basis of Gift Property.

As @Carl says above, you should  not have to pay tax on Rental Income you never received, and you have your prior year tax returns to prove that.

The IRS would probably not object if you claimed the income her sister sent as 'Other Income' in your return, and pay the tax on it without setting up the Rental Property in your return.  

However, his advice to seek legal advice is definitely sound. 

[Carl]

@MarilynG1 my concern is that it "sounds" to me like they had no idea the sister was renting it out. Because of that I'm of the impression that they are trying to "stick" them with recapture of depreciation they never took, as the sister is attempting to reduce the depreciation amount she has to pay taxes on.

While your method will work just fine, I would do it only after seeking legal advice and having the necessary documentation to back up the method used to report the income.

If they were sent "their share" of rental income over the previous three years in addition to their share of the sale price, I would treat the rental income as a gift and not included it on my tax return, since gifts are not reportable on any tax return anyway. But again, this would be only after seeking legal counsel for what I know will be coming 24-36 months down the road after I file.

Remember the three golden rules when dealing with the IRS.

1- You are guilty until proven innocent.

2- The burden of proof is on the accused (that's you the tax filer) and not the accuser.

3- If it's not in writing, then it did not occur.