Paying taxes on inherited house with my name on the deed

[arm418]

My mother put my name and my sister's on her house deed several years ago so that we could take possession upon her death. She died in Feb. 2016 and we sold the house 4 months later after painting, new hot water heater and other improvements. How do we declare on our taxes?

[Coleen3]

I'm sorry for your loss.

Since the house was put into your name prior to your mother's death, it is a gift, not an inheritance.Your basis in the gift is the probably going to be the Adjusted Basis of the donor. To that amount you can add any improvements to increase the basis.

To figure out the basis of property you receive as a gift, you must know three amounts:

• The adjusted cost basis to the donor just before the donor made the gift to you.
• The fair market value (FMV) at the time the donor made the gift.
• The amount of any gift tax paid on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.

If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your adjusted basis depends on whether you have a gain or loss when you dispose of the property.

• Your basis for figuring a gain is the same as the donor's adjusted basis, plus or minus any required adjustments to basis while you held the property.
• Your basis for figuring a loss is the FMV of the property when you received the gift, plus or minus any required adjustments to basis while you held the property.

Note:  If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and get a gain, you have neither a gain nor loss on the sale or disposition of the property.

If the FMV is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis at the time you received the gift. If you received a gift after 1976, increase your basis by the part of the gift tax paid on it that is due to the net increase in value of the gift. To figure out the net increase in value or for other information on gifts received before 1977, see Publication 551, Basis of Assets. Also, for figuring gain or loss, you must increase or decrease your basis by any required adjustments to basis while you held the property

[Critter]

Did Mom continue to live in the home & was her name still on the deed when she passed? If so there could be a life estate which would get a stepped up basis.

[Lonestar]

This is good info Coleen3! I hope you are sill around! (But, I must say, the more I read it the more confused  get, LOL)

Our situation is a bit complex and I'm trying to fit it into your bullet points but need more direction, if possible. 

Wife's aunt bought house decades ago for $A. Made my wife JTWROS on her house in 2006. Aunt passed in 2021. We sold the house just under 6 mos later for $B.

You mention 'adjusted cost basis to donor just  before time of gifting'. I assume making one JTWROS is treated as 'gifting'?  We did get a formal look-back FMV appraisal for the date made JT for figuring the donor's cost basis, which I believe is then halved with my wife, as JT, correct?

Then, effectively, the deceased donor's 'gain' is wiped out since 1/2 the sale price is the same as 1/2 the adjusted cost basis, since we sold the home within 6 months of the aunt passing and we understand that we can use that sale value as the FMV at the DOD. (Pls correct if wrong.) 

And finally, my wife's taxable gain is only the difference in 1/2 of the sale price, minus 1/2 of the adjusted cost basis at the time of the donation, correct?

I hope that's all clear enough.  I guess I'm looking for confirmation on how I'm figuring all this. Thx in advance!

[MarilynG1]

When your wife's aunt made her JTWROS, they each owned half the property (with each half being worth half what aunt paid for it).

When aunt died, your wife owned the entire property, one half at original cost basis when gifted, the other half at the 'stepped up cost basis' amount.

Add the original cost basis of the gifted half to the stepped-up basis of the other half for Cost Basis at time of sale. 

Your wife's gain on the sale would be Net Sale Proceeds - Gift Cost Basis (1/2) - DOD FMV (1/2). 

Click this link for more info on Cost Basis of JTWROS Property. 

[Lonestar]

Thanks Marilyn,

To be clear...

1) So then, something I'd heard prior, that I needed an FMV from the date made JT to set my wife's basis (and spent $1200 to obtain), is indeed irrelevant and not even considered? It seems logical to me that some entity would reset the basis due to the 'change in ownership' just like they reevaluate taxes on a home with change of ownership. Although, in this case, I suppose it's not really a complete change in ownership. (just musing)

2) Pls confirm that the 'stepped up cost basis' in your second point is the same as 1/2 the FMV at DOD.

3) We are talking the FULL Net Proceeds, those after sales expenses and I assume state taxes, being deducted as they were at closing, right? not 1/2 of the Net proceeds? 🙂

4 Does this Example look correct? Original cost to aunt - $50,000. When made JT, each holds $25,000.  FMV @ DOD (and sale price) - $300,000.  Taxable amount is calculated as...  $300,000 - $25,00 - $150,000 = $125,000.  (just to compare if cost basis adjusted at time made JT... and starting there... Cost basis at time made JT - $200,000; $100,000 assigned to each. FMV @ DOD - $300,000. Taxable amount is calculated as... $300,000-100,000= 

5) Oh! And after further reading some articles, it seems that the IRS(?) allows the sales price to be the FMV, if sold within 6 months of the inheritance... do you concur?

Thanks again!

Yea, so I ran our numbers the new way and unfortunately, it sends the Fed taxes due through the roof  because of using the original cost basis from 1967! Ugh... I guess that's why the government does it that way...  they can't stand for the servants to get something for nothing. LOL I'm going to talk to the CPA that told me about the cost basis needing be be adjusted at time made JT. 

[RobertB4444]

@Lonestar-

The basis at the date of gifting is indeed irrelevant because basis transfers with a gift.

The stepped up basis and the FMV at DOD are indeed the same thing.

Correct - you will deduct any selling expenses from the total received and then deduct the cost basis that you have.

Your first example is indeed correct.

The IRS does consider any sale made within six months of the DOD to be FMV.

[Lonestar]

Thanks! And shucky darn... 😖