My mother died suddenly in November of 2019. The title on her condo was TOD to me, with a single mortgage in place for about 25% of the current market value of the condo. We moved very quickly to sell her condominium and it sold in mid-January, just under ten weeks after her death. I found tax advice online stating the IRS would generally accept the sales price of inherited real estate as the FMV if it was within six months of the owner's death (9 months was also cited as a reasonable period). Obviously at ten weeks, I was well under either of these time periods. However, I can find nothing definitive directly from the IRS stating what is a reasonable time period for the sales price to be accepted as FMV for purposes of establishing Cost Basis at inheritance.
Using TurboTax Premier 2020, I claimed the January sales price minus the mortgage payoff as the FMV Cost Basis for the property. Under the adjustments, I claimed around $37,000 as "fees or selling expenses" as a deduction against the sales price. This actually resulted in a reduction of my income taxes prior to entering this property sale on my return. So my two questions are:
1) Does it appear I did everything correctly here?
2) Is there any IRS publication or guidance that states what a reasonable time period consists of to use a sales price as the FMV for the cost basis at inheritance? I feel I am safe at ten weeks, but would like to locate something concrete to cite as my justification. I've searched IRS publications exhaustively.
@TimHedrick wrote:1) Does it appear I did everything correctly here?
No, you did not. You do not deduct the balance of the mortgage from the FMV to arrive at your cost basis.
@TimHedrick wrote:2) Is there any IRS publication or guidance that states what a reasonable time period consists of to use a sales price as the FMV for the cost basis at inheritance? I feel I am safe at ten weeks, but would like to locate something concrete to cite as my justification.
No, but the IRC does reference an appraisal as being the most acceptable evidence of what constitutes FMV. Regardless, I would also feel safe with a sale occurring a mere ten weeks after death.
??? But you are only inheriting the deceased person's equity in the real estate, not the portion that remains owned by the bank and is paid off as a result of the sale. If I claim the full sale price of the unit, including the $160,000 or so that paid off the existing mortgage on the unit, I end up with a massive write down on my own taxes. That can't possibly be correct. I should not be entitled to deduct more than the approx $27,000 the sale cost me.
Again, the basic formula is simply:
Sales price (less selling expenses) LESS Adjusted basis = gain (loss) on the sale.
In your case, the basis is the fair market value on the date of death. The mortgage balance is irrelevant and does not factor into the equation.
@TimHedrick wrote:
......not the portion that remains owned by the bank
Note that the bank owned nothing; the bank merely had a lien on the property prior to the date the mortgage was paid off.