Tax on inherited apt. bldg.

[rigazior]

a friend died several years ago and left an apt bldg. to her two sisters and myself (not related). we have kept the bldg. for several years ( i lived in one unit and 1 sister in another of the 5 units). we have mutually decided to sell the bldg. what is our tax liability. do we owe inheritance tax, income tax, or capital gain tax.  How do we arrive at fmv of property at time death? when splitting up proceeds we each own different shares. how do we figure each. we have treated it as rental property  while we have owned and reported it as such on our taxes. are we intitled to take of upgrades prior to sale and sale expenses ?

[Critter]

PLEASE please please seek qualified tax prep help for this complicated situation since your question could take hours to discuss.  And because this will effect 3 tax returns it will need to be done the same way on all.  This is not a return that a non professional should attempt.

[Hal_Al]

You do not owe inheritance tax, You report the sale on your income tax return. It's complicated. The income potentially  consists of three pieces: 1. sale of your personal residence (excludable capital gain) 2. Sale of investment property (capital gain) and 3. Depreciation recapture (taxed at ordinary income tax rates up to 25%).

It also depends on how you were treating your ownership percentage on previous tax returns. Was you ownership % limited to the unit you lived in or not. Did you pay rent? Did the partnership file partnership tax returns.  You may not be eligible for the home sale exclusion.

Fix up expenses can be deducted as expenses of sale. Capital improvements ("upgrades") should be added to your cost basis.

Fair market value is determined with research. Sources: local realtors, property tax records, internet (e.g. Zillow).

As Critter#2 says, don't try to do this by yourself.

[SweetieJean]

"You do not owe inheritance tax"  You may, though, as some states have inheritance taxes that kick in at fairly low dollar levels..

[Opus 17]

For the FMV as of the date of the previous owner's death, you should be able to get one through a qualified real estate appraiser.  They can give a retroactive appraisal based on records of market conditions and sales of similar property for the year of death.  Your maximum tax would be the difference between the selling price and the FMV at date of death, but the gains could be reduced depending on how the ownership was structured, the fact that part of the property is your own residence, and so on.  You can also take into account the cost of any improvement that you made since inheriting the property.  But also, the cost basis starting with the FMV has to be reduce by depreciation taken during rental of the other 3 units.  Hire an expert and split the cost.