Do I have to pay US taxes a house sell in Mexico? I inherited the house and have not lived there in the past 5 years. I also have no income.

[evasquez686]

Hello

I inherited a house in Mexico when my grandfather passed away, now I'm selling the house and want to know if I has to pay taxes in the US. I have not lived in the house in the past 5 years and I have no income. How much would I have to pay if I'm selling the house for $116,000? What tax forms do I need to fill out? 

Thanks for your help

[Carl]

YOu need to see a tax pro most likely. It's just not possible to know if you will pay taxes or not after the sale. Basically, you first have to establish your cost basis on the house. Since you inherited it, your cost basis is the FMV of the property on the date the deceased passed away (not the date you inherited it). If you sell it for more than the cost basis, then you will pay taxes on the amount over the cost basis.

[Opus 17 · Accepted solution]

If you are a US taxpayer (US citizen, or permanent resident/green card holder) then you must report and pay tax on all your worldwide income.  There is a credit for foreign taxes if you paid them.

You would fill out a regular 1040 tax return with a schedule D for gains and losses from selling capital property.

You can't use the special rule for excluding gain from residential property since you never lived there, so you will owe capital gains tax on the gain.  The gain is the difference between the selling price and your cost basis.  If you inherited the home, your cost basis is the fair market value on the date the previous owner died.  You will need to make a reasonable effort to determine this, for example, by contacting an appraiser who can use historical records of selling prices of similar homes around the time of your grandfather's death.

Now, it so happens that the capital gains tax rate is 0% for single filers whose income is less than $37,000.  Above that the gains tax rate is 15%.  So even though you are required to file a tax return and report the gain, you might owe no tax if it is true you have no other taxable income, and the overall gain in value since your father's death is less than $37,000.

[evbats]

Could I include any repairs/updates/additions to the property into the cost basis? Or is just the fair market value of the home was when my grandfather passed away considered the cost basis? If it is possible to include updates and additions would I just be able to do an appraisal at what the current house value is to get an offcial price on what the house is worth or how would I prove that I have put in about $40,000 over the past years?

[Carl]

The cost basis of the property is the FMV at the time of your G-Dad's passing, plus the cost of any property improvements *YOU* paid for *AFTER* you inherited it.

[Opus 17]

Right.  When you get the stepped up basis as of the date of death, that covers everything that has happened to the property in the past.  Improvements you made after that date can be added to your cost basis.  And, you only add the actual cost you paid for the improvements.  You don't include the value of your own labor, and you don't consider how the market value may have increased due to the improvement.  Only what you actually paid for the improvement.

Repairs do NOT add to the cost basis.  The difference between an improvement and a repair is that a repair restores the property to as-was condition or maintains its useful life, while an improvement extends the useful life or increases the value of the property.  (Fixing a hole in the roof is a repair, replacing the roof is an improvement.  You don't get tax breaks for repairs that simply keep personal property in acceptable condition, that's just part of life.)

[evbats]

Would I need to prove that I put in $40,000 or would they just take my word?

[Carl]

Only if audited. You'd need to produce dated receipts, not only to prove you paid it, but to prove you paid it after the passing of the deceased.

[Opus 17]

You should save all of the paperwork that you need to prove the homes value for at least 7 years. This includes an appraisal or market analysis showing the value on the date of your father's death, and the receipts for all of your improvements. You only produce them if you are audited, but if you are audited and don't have them, your basis will be denied and you will owe a lot more tax.

[evbats]

Thanks for your help and fast responses. I think I have all the info I need, just gotta see how I come up with all those receipts from over the years.

[rdonahoe1997]

I will be paying long term gap gains in Mexico on the sale of a $1.2m resident.  Do I get any credit for the taxes I paid to Mexico on my California return?  I will have no other income.