Cost Basis and Capital Gains Calculation on Inherited Real Estate in 2020 that was sold in 2021

[MiguelDB]

I inherited my mom's old house in April 2020, along with my siblings.  My interest in the home was one third, and my 1099-S reflects this one third interest.  I'm assuming I should report only 1/3 of the selling expenses from the closing statement for the sale of the house, and I should also only report 1/3 of the cost basis.  Correct? 

Also, there was no appraisal done on the home at the time of my mom's passing.  However,  a realtor did a comparative market analysis (CMA) on the home approximately 8 and 1/2 months after her passing, prior to listing it for sale, in order to determine its fair market value (FMV).  The CMA was requested by our probate attorney to justify the listing price to the probate court.  Can I use the value (1/3 of total) on this CMA as my cost basis, even though it was done 8 and 1/2 months, instead of 6 months, after my mom's passing?  In the event of an audit, will the IRS reject the FMV in the CMA because of this?

[JulieS]

Yes, you should report 1/3 of the sales expenses and 1/3 of the basis on your tax return. 

Your cost basis should be as close to the value on your mother's date of death (or six months later, if the executor chooses).

Sources for the value include a realtor's opinion of value, comprehensive market analysis and tax records, although tax records tend to be about 10% to 20% lower than actual market value. 

I have never heard of anyone getting audited on this issue, so I think using the CMA is reasonable in your case.

I am very sorry for your loss. 

[MiguelDB · Accepted solution]

Thank you.  Just a few quick follow-up questions.

If I was living in Mom's house for several years, as my main residence, prior to her passing and my siblings and I inheriting, can't I just treat the sale of her house as the sale of my main home?  Does only having a 1/3 interest matter at all?  If Mom passed away in April 2020, is that the date that my siblings and I "acquired" the house?

When I say I used Mom's house as my main residence, I mean I was living there full-time (looking after Mom).  My driver's license, car registration and voter's registration all had her address on it.  And lastly, all of my W-2 forms tax returns also had her address.  I would think that would imply that Mom's house was my main residence for all intents and purposes, even though I did not have an ownership interest until April 2020.  Of course, utilities and homestead exemption were all in her name until her passing.

[DianeW777 · Accepted solution]

No, the implication does not fit the requirement.  You must meet the ownership portion of the test, and although you meet the use test, you do not meet the ownership test.

• Per IRS Topic 701 - In general, to qualify for the Section 121 exclusion, you must meet both the ownership test and the use test. 

The sale of inherited property can be entered using the following instructions.  

1. Open or continue your return (you can choose the Search box and type 'sale of second home' then use the Jump to link to enter your inherited sale) or follow the menu.
2. Under Wages & Income scroll to Stocks, Cryptocurrency, Mutual Funds, Bonds, Other (1099-B)
3. Answer Yes on the Did you sell any stocks, mutual funds, bonds, or other investments in 2021? screen
   • If you land on the Your investment sales summary screen, select Add More Sales
4. On the OK, let's start with one investment type screen, select Other, then Continue
5. On the Tell us more about this sale screen, enter the name of the person or institution that brokered the sale
6. On the next screen, select  Other (choose this also for inherited homes) then select I inherited it under How did you receive this investment?