Tax Year Prior to 2020: Home Sale filing after death of mother

[HC-FL]

My brothers, sister and I acquired our mother's house after she passed and was settled in probate in 2018. The home was valued at $208,220.21 based on similar listing comparisons provided by our realtor. We paid $18,240.65 in closing costs for the seller and made $8284.19 in improvements to the home. The home sold for 218,001.05. Since we paid more than the house sold for in closing costs and improvements than the house was valued at when we acquired it do we have to claim it in our 2019 taxes? If so how is that done for the four of us that were on the title?

[JulieS]

If you get a 1099-S Form in your name, for the sale of the home, you will have to report it on your tax return. Each of you should report your share of the sale. 

In Turbo Tax, enter the information under the Income & Expenses tab.

1. Look for Investment Income on the income list. If you don't see it, click on Add More Income in the lower left corner.
2. Select Stocks, Mutual Funds, Bonds, Other and click Start or Edit to the right.
3. Answer the first question, "Did you sell stocks, mutual funds, bonds, or other investments in 2019?" yes.
4. Answer the second question, "Did or will you receive a 1099-B form or brokerage statement for these sales?" no.
5. Enter a description on the next screen.
6. Select "Second Home" and "I inherited it".
7. Enter your information from the 1099-S Form. 
8. "Proceeds" and the date should match what is on the 1099-S Form.
9. In the box labeled, "Fair market value when previous owner passed away" enter your total basis. Your total basis is the value of the property when your mother passed away, plus any improvements you made and the cost of selling the property. 

If only one of you gets a 1099-S Form for the entire sale, that person will need to report the full amount of proceeds on their tax return. In that case, for the basis, they should report their 1/4 of the total basis and add 3/4 of the sale price to the basis to account for the amounts received by the other three.

If each of you gets a 1099-S Form reporting your share of the sale, you can just report 1/4 of the total basis for each of you.

I am sorry for your loss and hope you find this helpful.

{Edited 1/17/2020 12:41 PM}

[Hal_Al]

Depending on how the property was used between inheriting it and selling it, you may be able to deduct the capital loss.  The loss on personal use property ("second home") is not deductible.  However, if the property was vacant while waiting to be sold, it is considered investment property and the loss is deductible under normal capital gains rules.

[jtax]

Getting a 1099-S has nothing to do with whether or not you need to report the income. You need to report all income unless there is a exception. 

If the house was in your mother's name (or her revocable living trust) when she passed, then whoever inherits it gets a step-up in basis to it's fair-market value as of the date of her death. Not the date probate was finished or the deed was prepared or filed. The realtor's analysis will probably be ok, but could be challenged. A licensed real estate appraiser would give you much stronger support for your basis number, but would cost more.  Probably won't be an issue for this $ level and an obvious break-even or loss situation.

Each of you would report your % of each item (proceeds, cost of sale, etc.)

As @Hal_Al mentioned if the property wasn't rented you might be able to claim a loss. Whether you can actually do that is a surprisingly complicated legal question that really requires a tax-attorney familiar with your facts to answer. In prior years I had answers that detailed why that was the case, but in this new system I can't find that easily. I think you probably can, but it isn't black and white.

[HC-FL]

Who issues the 1099-S (i.e. the settlement agent or title company)?

[Hal_Al]

The settlement agent.  It's usually included with your closing papers, as opposed to being sent to you the following January, as most tax documents are (W-2, 1099-R etc).

[chastmlr]

the property was left to the three of us, but the well said that we had to sale it, and spite three ways. would this be inhearntax.

[WKins2]

The three of you would split the loss and report it on Schedule D (Form 1040 or 1040-SR), Capital Gains and Losses and on Form 8949, Sales and Other Dispositions of Capital Assets. 

To calculate how much loss should be reported on Schedule D and Form 8949, you must first determine your basis in the home. 

The basis of property inherited from a decedent is generally one of the following:

• The fair market value (FMV) of the property on the date of the decedent's death (whether or not the executor of the estate files an estate tax return)

• The FMV of the property on the alternate valuation date, but only if the executor of the estate files an estate tax return (Form 706) and elects to use the alternate valuation on that return. See the Instructions for Form 706.

In this case, it would probably be best to use the fair market value of the property on the date of the decedent's death  ($208,220.21). You would then increase that basis by the cost of any capital improvements ($8284.19). 

You would then report the sales price of $218,001.05 minus the cost of selling the home ($18,240.65) as the proceeds of the sale. 

This results in a loss of $16,744. If you each are equal beneficiaries, you would each report a loss of $5,581. 

Note: The maximum capital loss you can claim per year is $3,000. If you do not have other capital gains for this loss to offset, the amount of net loss over $3,000 will roll forward to your 2020 tax return.

For additional information on basis of assets, please see Publication 551. 

[Shellyw116]

Hi, what should a put if the house was vacant and was not a second home? 

Thank you

[KarenM90]

If you are selling an inherited property, you will report the loss on Schedule D and Form 8949.  

The basis of the property will likely be the Fair Market Value of the home on the date of death of the person from whom you inherited the property.  I am including a link to IRS Publication 551 which will provide you with more information regarding the basis of the property. Please see the bottom of Page 9 and 10 regarding Inherited Property  Basis of Property

To enter the sale in TurboTax, with your return open: 

1.  Go to Wages and Income and scroll down to Investment Income and find Stocks, Mutual Funds. 

2.  Follow the prompts in the section (you will answer no to the 1099B question)

3.  Choose type of investment you sold - select everything else

4.  The basic Information will be;

1. Description –  Usually the address of the property sold
   1. Sales Proceeds – Net proceeds from the sale 
   2. Date Sold – Date you sold the property
2. Tell us how you acquired the property - inheritance
3. Enter the date inherited
4. Enter your fair market value or determined basis.
5. Continue through the interview.

[jtax]

Note the basis gets "stepped up" to the FMV on date of death on any inherited asset that the decadent "owned" when he or she died. So if it was joint property, the ownership interest is usually 50% getting a 50% step up. 

If the beneficiary or estate spent money for the sale (commissions, new paint, utilities), there is a good change that will add to the basis (thereby creating a loss). But that is complicated for inherited properties and you are best off asking the advice of your estate attorney or a CPA or enrolled agent who specializes in this area (not a general practitioner).

If the property had been gifted and not inherited (as is sometimes the case) there would be no step up. Even just putting someone on a deed couple be a gift depending upon state joint tenancy law. (Again seek the advice of an attorney in that case.)