Calculate capital gains on the sale of a joint owned property after one owner dies

[soeldnew]

My father and I were joint owners on a home when he passed away in October 2019.

I purchased the house in 2000 for $179K and I lived in it from 2000-2012 and moved overseas with the Military.

I refinanced and added my father to the title and mortgage in 2012 and he lived in the home until he passed in 2019.  He made payments on the home during that time and claimed the home on his taxes.

When he passed the mortgage was $90K, which I picked up paying.  I put $20K into the house for repairs and upgrades and sold the home in July 2020 for $375K with $60K payoff of mortgage and $20K in closing costs.

Can someone help me calculate capital gain that I need to claim in Schedule D?

Thanks in advance 

[Opus 17]

Do you know whether your father was added to the deed "in fee simple", or if he had a "life estate", or you had a "life estate" or you were joint tenants with right of survivorship?  Or what was the language if different?

[soeldnew]

Thanks for commenting.

I do not know.  Based on our intent it sounds like joint tenants with right of survivorship?  We lived in the home together for about a year before I was transferred overseas.  When he passed I was the named sole beneficiary in his will, and there are no other heirs.  There was no court probate on the estate and it was handled as per his will.

[Opus 17 · Accepted solution]

Loans have nothing to do with your gains or cost basis. 

In the simplest case, you bought the home for $179K.

• When you gifted half the home to your father, you gifted half your cost basis, or $89,500.
• When your father died, you inherited his half the house with a stepped up basis equal to the fair market value on the day he died.  You do not give this figure, if you want to know, you will need to ask a real estate professional for a retroactive market analysis or appraisal.  Let's assume the value was $350,000, so you inherited a basis of $175,000.  
• Your adjusted cost basis is now $89,500 plus $175,000 = $264,500.
• Repairs do not increase the cost basis, but improvements do.  An improvement raises the value of the home or extends the life of its home or one of it's subsystems, like a furnace or roof.  Repairs, that restore the property to as-was condition, are not improvements and do not raise your cost basis.  Let's assume $10,000 of repairs and $10,000 of improvements.
• That would make your adjusted cost basis on the date of sale to be $274,500.
• You can include some of your closing costs in your adjusted basis, but not all of them.  Eligible costs are described in publication 523. https://www.irs.gov/forms-pubs/about-publication-523
• Your gain is the difference between the selling price and the adjusted basis. 

Also note that this may all be needless.  If you were overseas on government service (military, intelligence, or foreign service) you can suspend the 5 year residency rule.  You may be able to exclude the first $250,000 of your gain from any tax since this was your main home for two years before you sold it, even if it was longer than 5 years ago.  The rules for suspending the 5 year period are also in publication 523.

If you qualify to suspend the holding period and you qualify for the gain exclusion, you don't even have to include the sale on your tax return unless you received a 1099-S form at the closing.  If you got the 1099-S, you must report the sale even if you qualify for the exclusion, the form will show no tax owed.  If you were transferred overseas for a private company, this does not apply and your gain is taxable. 

[Anonymous_]

You cannot actually "gift" anyone one-half (or all) of your "cost basis" but, rather, the donee (receiver of the gift) generally takes your adjusted basis (a carryover basis) in the property, with certain exceptions.

Therefore, when you gifted one-half of your home to your father, the value of the gift was one-half of the fair market value on the date of the gift less one-half of any encumbrances (particularly, less one-half of your mortgage). 

As a result, you most likely should have filed a gift tax return (Form 709) for the year of the gift (2012), assuming the value of the gift exceeded the annual exclusion of $15,000.