My mother passed away in 2016. I inherited her primary home. It has mortgages on the property that I was a co-signer for. I am making payments. How do I handle this?

[Gator-Nation]

I was a co-signer but not on the deed.  It is my property now.  I am making payments, paying utilities, doing repairs, paying insurance an taxes, etc.  How do I file this property?  What can I claim?  How do I determine basis?  What if I rent or sell?  Can I claim mortgage interest even though she was the primary on the note?  Thanks

[Carl]

>>What should I do about expenses and repairs I do to the property in the mean time?  I have already had to put a roof on the house since her passing.<<

Repairs are not deductible "right now", because the property is not/was not a rental property. But it's important to understand the difference between expenses, and property improvements. Property improvements add to your cost basis. Since you will most likely be reporting this as a 2nd home on your 2016 return (which I recommend at this time), nothing you've paid for outside of property taxes and mortgage interest is deductible. However, you need to keep all records to prove your cost of property improvements. This is because when you sell the property, regardless of it's status when you sell it (be it 2nd home or rental) those improvement costs will reduce your taxable gain if you sell the property at a gain. Here's the clear cut definition of a property improvement.

Property Improvement.

Property improvements are expenses you incur that add value to the property. Expenses for this are entered in the Assets/Depreciation section and depreciated over time. Property improvements can be done at any time after your initial purchase of the property. It does not matter if it was your residence or a rental at the time of the improvement. It still adds value to the property.

To be classified as a property improvement, two criteria must be met:

1) The improvement must become "a material part of" the property. For example, remodeling the bathroom, new cabinets or appliances in the kitchen. New carpet. Replacing that old Central Air unit.

2) The improvement must add "real" value to the property. In other words, when  the property is appraised by a qualified, certified, licensed property appraiser, he will appraise it at a higher value, than he would have without the improvements.

>>The house is in need of much work.<<

I would suggest you go ahead and complete those things that would qualify as a property improvement, then in 2017 convert it to residential rental real estate and get it rented out ASAP. For those repairs that can wait until it's actively rented, let them wait and then you can deduct those expenses as rental expenses. There probably will be some repairs that you *have* to do, in order to get it rent ready. Those won't be deductible. But that's the way it is in the rental/landlord arena.

>>If I consider the home an investment property, how do I accommodate for these expenses?<<

Understand you can't "consider" something to be an investment. It doesn't work that way. You have to be able to "prove" that you acquired it with the "intent" to make money off it. Weather you actually make money or not is irrelevant. You have to prove "intent". Depending on your state, that can be difficult in the case of inherited property, unless you rent it out for a year or more.

But understand that if you do nothing and just turn around and sell it, most, but not all, of your repair expenses will qualify as deductible sales expenses.

??Are they used against the basis if I sell? <<

Again, it depends on the specific expense. Things like the new roof are property improvements and increase your cost basis. Something like getting the property treated for termites, or having a termite inspection performed would be a sales expense.

>>What happens to them if I decide to rent next year?<<

Quite a lot, and a lot of "what happens" can be more favorable on the financial and tax front for you in the long run. If I sound like I'm trying to talk you into being a landlord, that's because I am. You have a property with quite a bit of equity in it - equity that YOU did NOT pay for. (Your mom did). Rent it out, and basically the renter makes your mortgage payments, to include what's escrowed for property taxes and insurance. Your equity in the property continues to increase over time without you paying one penny out of your pocket, since the rental income would not only cover your payments, but would also over a relatively short period of time, reimburse you for those incurred expenses you could not deduct while getting the property "rent ready".

>>I was a co-signer on her mortgages which I am now paying.<<

Actually, I don't like that term "CO" signer. You were a "SIGNER" on the loan. You are now the primary borrower. Plain and simple.

>>She has a wonderful interest rate (due to a modification loan), but she is listed as the primary.  Is this something I will need to address as far as a refinance? <<

Unless you can get an interest rate that is "AT LEAST" two full percentage points lower than what you have now, I would not bother refinancing. As a signer on the loan, I can't see any reason and am not aware of any law at any level of government that would require you to refinance the loan in your name. It's "ALREADY" in your name.

>>Thank you everyone for your help and thoughtfulness.<<

I've been a landlord with three rental properties for 22 years now, and love helping others get started in the endeavor. I learned my lessons the hard way, and if I can save you the hassles I went through and help you glide into the rental investments arena less painfully than I did, then that makes it all worth it to me. Just understand that in the process of starting your first rental, it takes more of your time, than it does your money. But things tend to settle down about 2-3 months after your first renter moves in, provided you screen your tenants well before signing a rental contract. I'd have to say that close to 90% of what I know about rentals and landlording is what *not* to do..... and I didn't learn it by not doing it!

[Hal_Al]

Until you put it to use as your primary or second home or as rental property, or sell it, you have an investment property. The carrying costs (e.g. insurance & utilities) of investment property are deductible as investment expenses, but are subject to being a misc. itemized deduction also subject to the 2% of AGI threshold. Real estate (property) tax may be deducted on schedule  A, under taxes, without regard to the 2% rule.

Alternatively, taxpayers can elect to capitalize (add it to your cost basis)  the carrying costs of unimproved and nonproductive real property, real property under development or construction and personal property before its installation or use (Regs. Sec. 1.266-1(b)(1)).  The election is made with the tax return by its due date, including extension, by attaching a statement. You cannot wait until you sell the property, but must make that election each year. Attach the statement to the return and write “Filed pursuant to section 301.9100-2” on the statement. 

Mortgage interest is only deductible to the extent of other investment income and not subject to the 2% of AGI rule,  but can be capitalized. 

You can claim the mortgage interest even though you are not the primary on the mortgage. If you classify the property as a second home, instead of investment property, then the mortgage interest is deductible on line 10 or 11 of schedule A (not subject to the investment income limitation) but then your other carrying cost will not be deductible (except Real estate tax).

Your cost basis is the fair market value on the date of death. This is ideally determined by a formal appraisal, but a realtor's estimate, proerty tax bill or even an internet site like Zillow may suffice.

If you rent, you report the rental income and expenses on schedule E. If you sell, you have a long term capital gain or loss based on the difference between net sale proceeds and your coast basis. You may deduct a capital loss on investment property but not on a second (or primary) home. A gain is taxable either way.

[Opus 17]

Assuming you are the only heir, it's your house now, even if the deed has not been changed at the recorder's office (although get that done anyway).  As the owner you can deduct the mortgage interest and property taxes as long as you actually pay them.  (You probably need to notify the bank of her death and they will want you to refinance or legally assume the mortgage, but that is not a tax matter.)

Repairs and insurance are not tax deductible.

Your cost basis is the fair market value on the date of her death.  It will be a good idea to document that, a qualified appraisal would be best, a market analysis by a real estate agent might be ok.

Improvements that extend the useful life of the property or increase its value can be used to increase the cost basis, but repairs do not increase the basis.

If you sell, your capital gains are the difference between the selling price and your inherited cost basis plus adjustments for improvements.  If you never use the home for business or rental, you can get the first $250,000 of gains tax-free.

If you rent the home, you can deduct repairs, insurance, mortgage interest and property taxes as rental expenses against the income.  You also deduct depreciation (wear and tear).  But, some of that will be taxed when you sell, and if you rent it longer than 3 years, your gain will be taxable at that time as well.

[Carl]

I'm sorry for your loss. Basically, what Hal_Al and Opus_17 are saying, is that for now, since you're not renting it, it's your 2nd home. Your deductions at this point, are the Mortgage Interest that will be reported to you on a 1098 issued by the lender at tax time. Do note that you will only be able to deduct that mortgage interest that you actually paid out of *your* pocket. So most likely, when you enter this specific 1098 into the TurboTax program, you will select the box that says, "The interest amount I entered here is different from what's on my 1098". Then on the next screen you will explain the difference with a statement like "inherited property on (date)" and then press on.

Note that with the 1098, you enter each 1098 separately. So you'll enter the one for your primary residence, click "Add another 1098" and enter the one for your inherited property.

When you are asked for property insurance paid in 2016, you will enter the total of all property insurance that "you actually paid" on your primary residence and the inherited property. Now most likely, the mortgage payments you made will include excrow for property taxes and insurance. (Insurance isn't deductible). So if for example, you started making the payments on Oct 1 of 2016, then it's fair to say that you made 1/4 of the property tax payments on that property.

Note that you will need to pay attention to the date that property taxes were paid from escrow. If they were paid "before" you started making payments, then *you* didn't pay any of the property taxes on that property. But, if they were paid after you made just that 1st payment, then you can prorate the taxes paid for 12 months, and claim the amount for the number of months that you paid.

Most likely, assuming your mother's wealth was not transferred to an estate, you will be doing a final tax return for her. If so, then on her return you will report the pro-rated amount of property taxes paid from escrow with her money.

It's imperative that you get an official appraisal on the property ASAP, by a qualified, certified, licensed property appraiser. I guarantee you that you will need this. Understand that the appraisal done by your county property appraiser is not what I'm talking about either. Your county appraises the "tax" value of the property for the sole purpose of determining the amount of property taxes to be assessed each year. It has nothing to do with the fair market value of the property (the price you can sell it for) and is generally significantly lower than the FMV. SO get the appraisal done by a professional. You can expect such an appraisal to cost you between $300-$400 depending. on your location.

Why do you need an official FMV (Fair Market Value) appraisal?

 - If you sell the property, you will need that amount to determine the amount of taxable gain you make on the sale, or the amount of loss you can deduct on the sale. (Losses are only detuctible on the sale of business property, not the sale of your primary residence or 2nd home)

 - If you convert the property to a rental, you need to know the cost basis for tax depreciation purposes. That appraisal amount will be your cost basis at the time you convert it from personal use, to rental property.

Without the appraisal, if you are audited in the future on your depreciation amounts, or you claimed gains/losses on the sale of the property, you'll find it hard to prove your numbers to the IRS, and YOU WILL LOSE on any disagreement with the IRS on it's value.

Since you have not yet decided if you're going to rent it out, or just outright sell it, I would suggest you treat this property as a 2nd home for tax purposes when filing your 2016 taxes. That way, you've got more avenues to chose from without having to worry about the financial implications, after you get everything settled with your mom's stuff.

Generally, for folks in your situation I always recommend you wait an absolute minimum of six months after the passing of a loved one, before making any major decisions. It's okay to wait longer if necessary too. It's extremely difficult to think rationally during one's time of grieving. So I hope you find my information straightforward and helpful as you work through this.

[Gator-Nation]

What should I do about expenses and repairs I do to the property in the mean time?  I have already had to put a roof on the house since her passing.  The house is in need of much work.  If I consider the home an investment property, how do I accommodate for these expenses?  Are they used against the basis if I sell?  What happens to them if I decide to rent next year?
I was a co-signer on her mortgages which I am now paying.  She has a wonderful interest rate (due to a modification loan), but she is listed as the primary.  Is this something I will need to address as far as a refinance?  
Thank you everyone for your help and thoughtfulness.

[Hal_Al]

Since you consider the home an investment property, you have a choice oh how you handle the expenses and repairs. You may deduct them as investment expenses or capitalize them. See my answer for details. Improvements, like a new roof, must be capitalized (added to you cost basis); they cannot be expensed like repairs,

The expenses you choose to capitalize and the improvements (e.g. new roof)  are added to  the basis if you sell.  If you  decide to rent next year, you will start depreciating your whole cost basis (FMV + improvements + capitalized expenses).

Q. I was a co-signer on her mortgages which I am now paying, she is listed as the primary.  Is this something I will need to address as far as a refinance?  
A. No, as it concerns your tax filing. Since you own the property and are legally obligated to pay the mortgage, it is deductible to you, subject to the limitations*. You should ask the mortgage company and/or read the agreement to see what is required because of you mother's death.
*If you classify the property as a 2nd home, the mortgage interest is deductible, similar to your primary home. However, the mortgage interest on investment property  is only deductible to the extent of other investment income but not subject to the 2% of AGI rule,  but it can be capitalized, like other expenses.

[ROBERT151]

MY SON PASSED AWAY ON JAN 3 2022.I INHERTIED HIS HOUSE AND THE HOUSE WAS SOLD. HOW DO I HANDLE THIS IN THIS YEAR RETURN    /

[Hal_Al]

You will receive a form 1099-S for the sale, which must be reported on your tax return.

The cost basis of inherited property "steps up" to the fair market value on the date of death.  It is not what your son paid for the house.  So, you are unlikely to have much, if any, capiatl gain to report. 

If you did not use the house for your own personal use, you will be allowed to deduct any capital loss, after taking into account any expenses of sale (e.g. realtor commission). 

[Critter-3]

Look in the pile of closing paperwork you went home with ... the 1099-S should be in it. 

Sales price  -  ( DOD value + any improvements + cost of sale ) = profit or loss

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