topic Sale of Inherited Home Owned by Three Siblings & Tax Consequences in Deductions & credits

Sale of Inherited Home Owned by Three Siblings & Tax Consequences

RetiredNavy — Sat, 05 Dec 2020 04:47:42 GMT

My brother, sister, and I sold an inherited home (70 years old and in very poor condition) in North Carolina. My brother and sister are residents of NC, but I am not a resident nor do I have any income other than gains from the sale of the home. The home was appraised shortly after the death of our father and adjusted to the date of death. The appraised cost basis is $75,000. All numbers are hypothetical. For simplicity, I am rounding all numbers to the nearest thousand.

Cost Basis

Sibling 1: $25,000 Inherited Cost Basis (1/3 Appraisal), $40,000 (Remodeling expenses) = $65,000

Sibling 2: $25,000 intherited Cost Basis (1/3 Appraisal), $5,000 (Remodeling expenses) = $30,000

Sibling 3: $25,000 Inherited Cost Basis (1/3 Appraisal), No remodeling expenses = $25,000

In addition, we had two year's worth of property taxes, utilities, and homeowner's insurance. Closing costs (real estate, attorney, & all fees) = $3000. Sibling 1 paid for all property taxes, utilities, and homeowner's insurance.

The sale price is $200,000. I believe this sale is a long-term capital gain distribution (>2 years) and my cost basis is $65,000 (Sibling 1). We are splitting the net equally. The distribution at closing was set up to account for expenses, so Sibling 1 will get one-third of $200,000 - $3000 (real estate & closing fees) plus improvements ($40,000). Sibling 1 will get a check for approx. $ 105,000 (($197,000/3)+$40,000)

2. Does sibling 1 (non-resident of NC) have to file an NC state income tax return?

3. Are the utilities and other expenses considered part of the cost basis?

4. Is a termite inspection and treatment part of the cost basis if the title company requires the work prior to closing?

Re: Sale of Inherited Home Owned by Three Siblings & Tax Consequences

Critter-3 — Sat, 05 Dec 2020 11:56:08 GMT

The sale price is $200,000. I believe this sale is a long-term capital gain distribution (>2 years) and my cost basis is $65,000 (Sibling 1). It is automatically long term cap gains due to it being inherited even if you sold it 1 day after death.

1. Does sibling 1 report the gross proceeds as $105,000 and subtract the $65,000 cost basis? Siblings 2 and 3 follow a similar process with their share. We do not know if a 1099 will be issued, but the form, if issued, will most likely show the total gross proceeds and not match the above split amounts. Each of you WILL get a 1099-S at closing reporting your portion of the gross sales price ... look for it in the mass of papers you will walk away with. Then when you complete the tax return you get to enter the cost basis to offset the sales price to net the gain.

2. Does sibling 1 (non-resident of NC) have to file an NC state income tax return? Yes... you have a NC sale and NC will require a return for the NC income.

3. Are the utilities and other expenses considered part of the cost basis? Holding costs are not added into basis unless you had made the election to capitalize them on the prior year/current year return.

4. Is a termite inspection and treatment part of the cost basis if the title company requires the work prior to closing? If this was part of the closing costs reported then you will each take your % of them on your return ... it is added to the basis.

Simplest formula :

Cost basis = inherited cost + improvements + capitalized costs + cost to sell

Sales price - cost basis = long term cap gains or loss

May I suggest one of you employ a local tax professional to be educated on what is needed and how to do it then share the info with the others.

Re: Sale of Inherited Home Owned by Three Siblings & Tax Consequences

NCperson — Sat, 05 Dec 2020 15:19:55 GMT

@RetiredNavy - On answer 2, to the extent you live in a state with income tax, you will get a credit in your home state for the tax paid to NC, so you are not taxed twice on the same income. It's VERY important to complete the NC tax return first and watch for the credit to be placed on your home state tax return.

Re: Sale of Inherited Home Owned by Three Siblings & Tax Consequences

RetiredNavy — Mon, 07 Dec 2020 17:10:49 GMT

Thank you. I was able to use your response to look up the documents for claiming the home.