Selling an inherited house and capitol loss/gain

[Clayqueen11]

In 2016 my Mom passed, and my 2 sisters and I inherited the house. Mom bought it in 2006 for 219,000. We do not have a written appraisal at her time of passing, but in 2016 it was worth about 176,000, supplied by realtor comps. My sister moved in later that year, and she moved out in February 2020. She lived there for 3.5 years. We sold the house in April 2020, for $230,000. The net profits, after closing costs, real estate commission costs, was $212,000. I have read about "stepped up basis" costs, regarding value at passing and value at selling time, and how that works. But what I can not find is our scenario where the house actually sold for less than its original purchase price in 2006.  Can anyone tell us how this will work with capitol loss/gains? We did not pay for any improvements in the property from 2016-2020. But there were improvements made from 2006 to 2016. Thank you!

[M-MTax]

With an inherited house like in your question the purchase price doesn't matter at all. You use the fair market value on date of death whether it's a step up OR a step down. If it was only worth $176k on the date of her death then that's the basis and it doesn't matter if she paid more for it. But your sister can exclude her share of the gain because she owned and lived in the house for 2 or more years out of the last 5. You can't because you didn't live there. 

[Clayqueen11]

Thank you for your quick response. Just to clarify, the status of ownership was in a trust, and we 3 shared it equally until the house sold in 2020. Ownership was not passed to my sister. She simply moved in and lived there for 3.5 years. It sounds like there would be a $36,000 gain to pay in taxes. Where as the original purchase price was $219,000 (in 2006), which is more than what it ultimately sold for (in 2020). Am I understanding this correctly? 

[M-MTax · Accepted solution]

Yes, there would be a $36k gain from the amounts you posted......$212k - $176k

[Clayqueen11]

Thank you again, for your response. I am still not clear on my sisters portion of this gain, since she lived there, but had equal ownership shared with the 2 of us. Can I assume we will share the $36,000 gain in 1/3rds, ($12K) Is she entitled to a different % since she lived there for 3.5 years? 

[Irene2805]

If the house was owned by the trust and if the trust sold it, the proceeds go into the trust and then get distributed to you and your sisters as beneficiaries.  The percentage you each receive is specified by the trust documents.  The fact that one of your sisters lived in the property has no bearing on her percentage, unless the trust documents say otherwise.

[M-MTax]

The trust absent unusual circumstances will have to file a 1041. Get a tax pro.

[PattiF]

It is possible to file a 1041 yourself. You may feel comfortable with the preparation of a Trust return  or want to hire a professional.

You'll need TurboTax Business to file Form 1041, as the personal versions of TurboTax don't support this form.

TurboTax Business is available for Windows on CD or as a download. It's not available for Mac or in our online versions of TurboTax.

After you install TurboTax Business and begin working on your return, you'll be asked which type of return you need to prepare. Select Trust or Estate return (Form 1041) and proceed.