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So, just to be clear, you, your husband, and his siblings took possession of the house prior to the death of his mother.
May I assume that none of you then used the house as your own residence?
- Added comment: It has been suggested to ask: Did your in-laws transfer the deed at an earlier date into a Life Estate?
Given that, you should understand the following:
All of this is to say that those who took possession prior to death DID NOT INHERIT (legally) but instead were the recipients of a GIFT.
Upon sale your husband and siblings have a capital gain or loss based on the net sale price and less the original cost basis of their mother. This would be adjusted: Adjusted basis being, in this case, the value of the house at date of death + repairs and improvements you made to the house in preparation for the sale.
By the way, I assume a Form 1099-S was issued - but to whom?
Your husband's net share of the capital gain or loss would be reported on your joint Schedule D. The house would be considered an investment and not a primary residence so a loss is eligible for reporting.
Make sure you are in the 'Stocks, Mutual Funds, Bonds, Other', section of the program, which is in the Investment Income section; not the Home Sale section, which is in the Other Common Income section, since this isn't your personal residence.
NOTE! Be careful that you pick in the pull-down list that this is not t a "Not a sale reported by an investment institution" instead use "Everything Else"
You will get the screen that says "Enter Your Investment Sale Information". Here you enter description (i.e., gifted house; sale of property, etc) proceeds, date of sale, cost basis (fair market value on date of death of the decedent). For the pull-down entry of "How Acquired" make sure to select "GIFT"
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