calculating basis on primary home owned for 40+ years

[aem1337]

My mom recently sold her house that she owned for over 40 years. Original purchase price was ~30k in 1970s; she sold it for ~700k this year. The house underwent several renovations over the years, kitchen x2, raised roof/added bathroom, multiple bath renovations, finished basement, new windows x 2, etc etc etc.  A lot of this work was done in the 80s and 90s. How would she go about adjusting the basis? She doesn't have receipts for most of the work and some of it was done by my dad. My dad passed away and my mom was  the sole owner so her capital gains exemption is 250K. 

Thanks for any advice on where to start.

A.

[leeloo]

There isn't much you can do without receipts but to try and recreate the amounts to the best of your recollection. The labor of your father would not be included, so it would just be the materials purchased.  You might find out what the materials cost today and find out the dollar value for that given year. Truly, though, you always need to keep receipts.

[tagteam]

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@aem1337 wrote:

My dad passed away and my mom was  the sole owner so her capital gains exemption is 250K. 

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When did your dad pass and was he on title with your mom at that time?

If so, your mom likely took your dad's share of the property (presumably 50%) at the fair market value on the date of his passing (i.e., a stepped-up basis for your dad's share). Depending on the date of his passing and the FMV at that time, this could produce a better result than tracking down the cost of improvements made decades ago.

[Mike9241]

was your mom co-owner or did she inherit the property from her spouse?  as co-owner  50% of the basis would be Fair Market Value on the date her spouse died. her basis in the other 50% would be cost + 50% of the improvements made before he died. after that add 100% of the cost of improvements.  if she inherited 100% then is the fair market value on the date of death plus the cost of subsequent improvements. certain rules apply as to whether improvements add to the basis. In order to add to the tax basis, an improvement must adapt the home or part of the home to a new use, prolong your home’s useful life or add to the value of your home. Unless the improvement meets one of these criteria, you can’t include the cost.

[Carl]

Was your mother married? If so, and if her husband passed away at any time during their ownership, she would inherit her husband's ownership share in the property at a minimum. The cost basis would be the FMV of his share on the date of his passing.

If in a community property state, she gets a step-up in basis on the entire value of the house. Otherwise, she gets a step-up in basis of his 50% ownership in the property on the date of his passing.

Then, you would add the cost of any property improvements done "after" his passing, if you have the paperwork to prove the cost of those improvements.

[tagteam]

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@Carl wrote:

Was your mother married? If so, and if her husband passed away at any time during their ownership, she would inherit her husband's ownership share in the property at a minimum. 

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That would not necessarily be the case. It would be dependent upon how title was held on the date of passing, any testamentary documents, and/or state law.

[Critter-3]

WHEN did her spouse pass ?  That could determine how much personal residence exclusion she can legally use. 

[aem1337]

Thank you for your responses.

He passed in 2019. They were both listed on the deed so she would have taken his share at that time.  The step up basis will definitely increase the basis more than estimating past improvements.

To calculate the step up basis would it be 0.5 x FMV 2019?  

[Critter-3]

Since he passed more than 2 years from the sale of the home the exclusion option will not be available but you do need to calculate the updated basis.  Using this word formula you can enter in the figures to come up with the needed figures for reporting the sale in the TT program.

Original purchase price of the home + cost to buy + improvements up to the date of death = cost basis to DOD  ...   Each spouse gets 1/2 of that cost basis. 

DOD value is  determined and the surviving spouse now gets 1/2 of the DOD value + the 1/2 of the cost basis prior to DOD + improvements made after the DOD + cost to sell =  cost basis for surviving spouse 

Selling price -  cost basis for surviving spouse =  profit/loss

Surviving spouse can excluse up to $250K of the profit ... any excess profit is taxable at a long term capital gain rate. 

[aem1337]

Thanks critter-3.  You must have read my mind as I was editing my response above! That is a confusing formula (thanks tax law), but i will figure it out.  And if I can't we  can always get the help of an accountant. 

Is there a specific turbo tax product you would recommend? I used turbo tax deluxe for 2022 and may try to run the numbers just to see what we get. I'm glad I started trying to figure this out in May. Gives us almost a year to figure it out!

[Critter-3]

You can use ANY of the downloaded programs ... use Deluxe if you need to file a state return and Basic if you don't.

If you use the ONLINE program you must use the Premier or better. 

[tagteam]

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@aem1337 wrote:

To calculate the step up basis would it be 0.5 x FMV 2019?  

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That would be the case, as @Critter-3 mentioned earlier, in a common law state. 

There would be a full step-up in basis if they resided in a community property state.

[aem1337]

it's not a community property state unfortunately!

[aem1337]

I was going through the formula and realized FMV at time of death was not (obviously) included. Would I add the cost basis as of 2019 to step up basis to get the DOD value? 

For example:

  price of home 30k

   + cost to buy - 2k (etimating real estate fees at time)

 + improvements thru 2019 - 100k (estimate)

= cost basis as of 2019- $132k

Would i then add FMV at time of death (~450k from zillow/redfin) to the cost basis (132k) to get DOD value (582k)? 

[tagteam]

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@aem1337 wrote:

Would i then add FMV at time of death (~450k from zillow/redfin) to the cost basis (132k) to get DOD value (582k)? 

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No. For the one-half that was acquired by your mom from your dad, the basis would simply be the fair market value on the date of death (your mom would use her cost basis plus improvements for her one-half interest).

Note that a date of death appraisal by a certified real estate appraiser would be the optimum method for determining the fair market value on the date of death.