Sale of inherited home

[kcampion]

My mother passed away in 2008, and left her house to my sister and I.  House was appraised at $267,000 then. We rented the house for 14 years, and sold it in 2021 for $320,000. Info on 2021 TT is the total depreciation recapture is $59,748. Settlement costs were $18,500., improvements totaled $39,508. Our Fed Form 4797 Part II Line 18 shows -14,286. Our adjusted gross income $48.637. That figure was transferred to Maryland Form 502. 

Md has somehow come up with a total income of $122,170., total MD income at $83,982.  and tax due of $5,709.  They've told me the house sold with a gain of $59,748., which is also the depreciation recapture.

but have not told me how they've come up with that so I will be asking for an in-person appeal.

Can anyone give me some help understanding this mess?

[Anonymous_]

You may get some sort of answer here, but you will most likely have to deal with the Comptroller's office for this issue.

To clarify (primarily for others), you mentioned your sister and you inherited the house and rented it and then stated, "our adjusted gross income.....". Since you could not file a joint individual income tax return with your sister, to which person do those figures apply (or were they combined)?

[kcampion]

Sorry, I meant my husband and mine's ADJ.

[Anonymous_]

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@kcampion wrote:

Sorry, I meant my husband and mine's ADJ.

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Good. Just for the purposes of further clarification, the figures you posted for the property are for you and your sister combined, correct?

[kcampion]

Yes! 

[Mike9241]

House was appraised at $267,000 then. We rented the house for 14 years, and sold it in 2021 for $320,000. Info on 2021 TT is the total depreciation recapture is $59,748. Settlement costs were $18,500., improvements totaled $39,508. Our Fed Form 4797 Part II Line 18 shows -14,286. 

something isn't right and we can not see your return

FMV @ DOD                267,000

improvements               39,508 assuming after inheritance

total cost                      306,508

depreciation                  59,748 assuming after inheritance

adjusted tax basis       246,760

selling price                  320,000

selling expenses            18,500

net selling price           301,500

gain 301,500 -246,760 = 54,740

I don't know how TurboTax came up with a loss based on the number you provided.  so you may have federal issues besides state issues. 

since depreciation exceeds the gain the entire gain for federal purposes would be subject to IRC sec 1250 recapture

i can probably tell you what you may have done incorrectly. in Tutbotax when you dispose of rental property you are supposed to allocate the sale price among the various components - land, building and improvements. Selling costs are allocated based on the sales price allocated to the components. Most likely you allocated $0 to the improvements so the undepreciated cost shows up as a loss on the 4797. 

[kcampion]

House & land figures were set up wrong from the beginning in 2008. I'm trying to learn about 1231 carryovers. I was allowed depreciation of 59,748 but actually took 41,060, how exactly do I rectify this?

[Anonymous_]

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@kcampion wrote:

...I was allowed depreciation of 59,748 but actually took 41,060, how exactly do I rectify this?

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File Form 3115 (it is a Section 481(a) adjustment), which is not a DIY endeavor; you should seek guidance from a local tax professional.

See https://www.irs.gov/instructions/i3115#idm140516453720416

https://taxexperts.naea.org/listing/service/individual-tax-preparation

[kcampion]

Turbo Tax has used the SL/MM (27.5 ) what type of method would I be changing to?

[Anonymous_]

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@kcampion wrote:

Turbo Tax has used the SL/MM (27.5 ) what type of method would I be changing to?

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That would be the correct recovery period and method, but you stated that the property was set up incorrectly in 2008. 

As a result, you need to make an adjustment for the foregone depreciation, which is made on Form 3115.

[kcampion]

When setup in TT in 2009, the house cost was listed at 60,166 and the land at 73,334. The total of 133,500 is correct (for my half) but seems the amounts were switched. That must be why the depreciation was never figured correctly.

[Anonymous_]

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@kcampion wrote:

When setup in TT in 2009, the house cost was listed at 60,166 and the land at 73,334. The total of 133,500 is correct (for my half) but seems the amounts were switched. That must be why the depreciation was never figured correctly.

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Understood (and see the note at the bottom).

Now, however, you need to file Form 3115 and make a Section 481(a) adjustment so that you get the proper depreciation deduction (i.e., the amount that was foregone).

Also, you since the wrong basis was used at the outset, you can most likely ignore making any adjustment and simply use the original basis of the structure and the accumulated depreciation calculated thereon.

Note: Since using the incorrect basis could be considered a mathematical error, you probably do not want to amend (since it is way past the limitations period) nor file Form 3115 (since that would not be appropriate). Simply use the basis used originally to figure the accumulated depreciation (even though it was not the correct basis).