Deductions on Sale of Remodeled & Inherited Home

[Kevin R]

We (siblings & I) inherited a home in Nov. 2018 & sold it in Jan. 2021 (> 2 years). The cost basis is established by an appraisal for the date of death. My stepmother had a life estate (revoked when she moved out) but remained in the home for over a year, so we could not start work.

After inspecting the property, we discovered major structural issues and code violations that prevented us from selling the home. We remodeled and sold the home. Remodeling items: Replaced some 0rafters & roofing, replaced some floor joist, floors, sheet rock ceilings to contain asbestos tile, kitchen cabinets, interior doors, all new plumbing, relocated laundry, new AC/Heating, bathrooms, paint, windows, landscaping, etc.

Are these items considered repairs or capital improvements (i.e., deductible)?

Can I deduct the cost of travel (my labor is a definite NO) from out of state to complete repairs?

The home appraised for $75K and sold for $180K after remodel.

[ColeenD3 · Accepted solution]

Yes, these are improvements. You are correct that your initial basis is the FMV on the death of your mother. You would add the costs of the improvements to your basis to get your adjusted basis.

No, the travel is not deductible. It would have had to have been a business property.

[Kevin R]

Thank you. The IRS publications leave many details out.

[nello]

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@ColeenD3 wrote:

No, the travel is not deductible. It would have had to have been a business property.

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Can you point me to a source for this or any comprehensive guide regarding costs that are deductible when preparing inherited real estate for sale?

Thank you.

[PattiF]

None of the expenses are deductible, but some of the expenses can be added to the basis. This will increase the basis of the property and lower the amount of the gain, if any.

IRS Publication 551 has examples of Increases and Decreases to Basis in Table 1.

Home improvements may come into play when you sell your home because they're included in your home's adjusted cost basis. The bigger your basis, the smaller your capital gain, and that means less tax.

To qualify as an increase in the adjusted basis when you sell, the home improvement must:

• Add materially to the value of your home; or
• Prolong your home's useful life significantly; or
• Adapt your home to new uses

Here are some examples of improvements:

• Remodels and room additions (including decks and porches)
• New or upgraded landscaping, irrigation, sprinkler system
• Hardscape such as pavement, block or retaining wall, patio
• Fencing
• Swimming pool, spa
• Storm windows, doors
• New roof
• Central vacuum or security system
• Upgraded wiring, plumbing, ductwork
• Central heating, AC, humidifier
• New furnace, water heater
• Filtration, soft-water, or septic system
• Built-in appliances
• New flooring or wall-to-wall carpeting
• Upgraded insulation
• Satellite dish

[Jamie00716]

What if there is no capital gain? Ie, the house was inherited and sold within months so the step up fmv basis and the sale price are equal. Would any improvements made after inherited still be able to be added to the basis to result in a capital loss in the amount of only the improvements? Or are the improvements used to offset only if there is a gain when inherited since there was no initial purchase? 

[PaulaM]

No, losses for personal use property (inherited property) are not recognized.