All of the repairs, maintenance, and improvements to the property can be added to the basis of an inherited property when determining the gain (or loss) on the sale.
Also, keep in mind that the basis of inherited property is its Fair Market Value(FMV) on the date of death of the original owner or the alternate valuation date of the estate (if applicable) and not the original purchase price.
@SusanY1 - THANK YOU for your response.
However, I'm a bit confused when you say "All of the repairs, maintenance, and improvements to the property can be added to the basis...". Does that mean the FMV on the date of death actually increases?
For example, the FMV on the DOD is $200,000.
House sold @ $225,000.
Realtor commission 5% = $11,250
New HVAC = $5,000
Repairs, Painting and Power washing = $15,000
When I enter the values in TurboTax - my net proceeds will be: $193,750 and the FMV is $200,000 - resulting is a capital loss of $6250. Is this correct?
Yes, that is correct if the property you sold is a business property, such as a rental or property held for investment. If it was only used for personal purposes you would not be allowed to claim a loss.
I'll assume all the items you mentioned were incurred after you inherited it and were to make it ready for sale.
Realtor commission 5% = $11,250 this is a selling expense
New HVAC = $5,000 - this is added to basis
Repairs, Painting and Power washing = $15,000 this is selling expense
When I enter the values in TurboTax - my net proceeds will be: $193,750 and the FMV is $200,000 - resulting is a capital loss of $6250. Is this correct?
there usually are other selling expenses such as title charges, we can't see the closing statement, so there could be others.
whether the loss is deductible depends on what use it was put to if any, after the inheritance. if used as a personal residence - the loss is not deductible.
if it was left vacant and intended to be sold or it was rental, this would be investment property and the loss would be capital.
@Anonymous
Yes, all items were incurred after the property was inherited to prep the house before putting it on the market.
The house was never used as a personal residence - it was left vacant and sold.
Thank you for clarifying that the HVAC increases the cost basis (FMV) - I did not realize that. Does it increase the cost basis even if the new HVAC replaced an older one that broke?
So basically, I must report the Cost Basis as $200,000 (FMV) + $5,000 - correct?
Proceeds will be $205,000 less ALL selling expenses, including any title charges - correct?
THANK YOU again for your help!
An additional question - since TurboTax asks me to enter FMV and the Net Proceeds value - is it better to adjust the cost basis with all my commissions, expenses and improvements? Or should I add the improvements only to the FMV and deduct the expenses and commissions from the Net Proceeds. Since I was given a 1099-S should my net proceeds match what is on that form?
Any gain from the sale of an interited home is based on the difference between the Cost Basis and Sales Proceeds (reported on 1099-S).
You can add any Expenses you incurred fixing the house to prepare for sale (plus Sales Expenses) to the Cost Basis (value on date of death).
Click the link for detailed info Reporting the Sale of an Inherited Home.
Can the monthly HOA fees, utilities, security and Homeowner's insurance costs from the date of inheritance to the date of sale also be included as an expense added to the Cost Basis?
These expenses were paid out of pocket and not from the estate.
Yes, any expenses required to make the property saleable. Click here for more info.
The responses to this question vary here and for other similar questions. I realize an inherited home that is not used for personal use is considered an investment. But which is it, are painting and repairs which get an inherited non-rental home into selling condition a selling expense or are they added to basis (the home FMV on the date of death)? Can anyone provide a IRS citation that says which is allowed? (The IRS pubs for basis and for selling a home, both of which mention inherited homes, seem to imply painting and repairs are neither selling expenses nor added to basis.) Thanks.
The bottom line is that if you inherit property and later sell it, you pay capital gains tax based only on the value of the property as of the date of death. “If you needed to make home improvements in order to sell your home, you can deduct those expenses as selling costs as long as they were made within 90 days of the closing.
Examples of common property repair and maintenance expenses that are generally deductible in computing rental business profits include:
You can enter this info in the investment section of TurboTax. Select the product you’re using for the right instructions.
Note: To report investment sales, you’ll have to use TurboTax Premier, TurboTax Self-Employed, or TurboTax Home & Business.
Sale of inherited home
Thanks but I am not talking about improvements, I am talking about repairs. Also, elsewhere I have seen this regarding the 90 rule you reference: "Run-of-the-mill home repairs necessary to maintain your property’s condition or get it ready for sale are not tax deductible under current tax code Publication 523. Confusion arises over online reports that may erroneously refer to dated federal IRS code that allowed home sellers to deduct “fixing-up” expenses, such as “the costs of painting the home, planting flowers, and replacing broken windows” completed in the 90 days prior to closing. That tax break no longer exists. " I have seen similar statements and the 90 day repair rule might have been eliminated by the Tax Cuts and Jobs Act of 2017, but maybe the 90 day rule still applies to inherited non-rental investment property? That is why I am asking for a IRS citation where it says painting/repairs (not improvements) are either selling expenses or added to basis for non-rental inherited home not used personally (investment property).
As far as your reference to repair and maintenance expenses deductible for rental property, the inherited home is not rental property.
Thanks.
There is no 90 days of selling expenses listed in the IRS pub. If you acquire property other than through a purchase (such as a gift or an inheritance), refer to Publication 551, Basis of Assets for more information. On the left side, you will see Main Content, Scroll Down to Real Estate. Click on the blue link for Real Estate.
Related:
About Publication 551, Basis of Assets
Thanks. I followed your link and see Real Property on the left side of Pub 551 and click on it. However, I cannot locate in the pub where it says repairs, painting, etc., which are referenced in the original question, can be be treated either as selling expenses or added to basis. Most of the responses to this question state either treatment is allowable but do not provide a citation. So if you have a specific section of Pub 551, or a different citation where it states either treatment is allowable, could you please provide it. Or are you saying repairs, painting, etc. made to an inherited non-rental home that is investment property cannot be treated as selling expenses nor added to basis? Thank you.
There is a difference between a capital improvement that increases your home’s value and repairs such as painting your house, and whether you can deduct these costs when the purpose is to sell your home has to do with timing. The source on the IRS website is below but first here is some clarification about repairs and cost basis:
Most repairs that return your home to its original condition won’t increase your cost basis. Improvements that last more than a year and add value to home do increase your home's basis, however, as long as they are still apparent when your home is sold. An example of this would be a home remodel project. Let's say you paint your home while you live there. That does not count because it is maintenance and restores it to the original form. You refinish the floor - it also doesn't count. However if you refinish the basement, then the paint and flooring that you buy for the project does count because it is part of the remodel. Remodeling increases the basis of the property.
When you do repairs (home improvements) that would be considered maintenance because you want to sell the home, it's different. In this case, you can deduct those expenses as selling costs as long as they were made within 90 days of the closing. The timing is very important.
Here is the source on the IRS website, Pub 530:
Improvements.
An improvement materially adds to the value of your home, considerably prolongs its useful life, or adapts it to new uses. You must add the cost of any improvements to the basis of your home. You can't deduct these costs.
Improvements include putting a recreation room in your unfinished basement, adding another bathroom or bedroom, putting up a fence, putting in new plumbing or wiring, installing a new roof, and paving your driveway.
Amount added to basis.
The amount you add to your basis for improvements is your actual cost. This includes all costs for material and labor, except your own labor, and all expenses related to the improvement. For example, if you had your lot surveyed to put up a fence, the cost of the survey is a part of the cost of the fence.
You must also add to your basis state and local assessments for improvements such as streets and sidewalks if they increase the value of the property. These assessments are discussed earlier under State and Local Real Estate Taxes .
Improvements no longer part of home.
Your home's adjusted basis doesn't include the cost of any improvements that are replaced and are no longer part of the home.
Example.
You put wall-to-wall carpeting in your home 15 years ago. Later, you replaced that carpeting with new wall-to-wall carpeting. The cost of the old carpeting you replaced is no longer part of your home's adjusted basis.
Repairs versus improvements.
A repair keeps your home in an ordinary, efficient operating condition. It doesn't add to the value of your home or prolong its life. Repairs include repainting your home inside or outside, fixing your gutters or floors, fixing leaks or plastering, and replacing broken window panes. You can't deduct repair costs and generally can't add them to the basis of your home.
However, repairs that are done as part of an extensive remodeling or restoration of your home are considered improvements. You add them to the basis of your home.
The answers continue to vary regarding the treatment of repairs (not improvements) referenced in the original question. Below is a summary.
SusanY1 says "All of the repairs, maintenance, and improvements to the property can be added to the basis of an inherited property when determining the gain (or loss) on the sale."
RobertG agrees these items can be included for determining gain or loss, although it is unclear whether they are added to basis or are treated as selling expenses.
Anonymous says the Repairs, Painting and Power washing are selling expenses.
MarilynG1 says "You can add any Expenses you incurred fixing the house to prepare for sale (plus Sales Expenses) to the Cost Basis." Also to a follow-up question about monthly HOA fees, utilities, security and Homeowner's insurance costs also being added to basis; MarilynG1 also says "Yes, any expenses required to make the property saleable" but none of the other responders mention HOA fees, utilities, security and Homeowner's insurance costs.
Cynthiad66 references improvements made within 90 of closing, which appears to be old info, and the implication is the items are neither added to basis or selling expenses. She also addresses repair and maintenance deductions are allowed for rental property, but that is not the subject issue.
AmyC says there is no 90 day rule and just references Pub 551 Basis of Assets, but I don't see anywhere in the pub says the items can be added to basis or treated as selling expenses like many of the above responders state.
ReneeM7122 also references repairs made within 90 days of closing are selling costs and she references Pub 530, but the 90 day rule is not in the Pub and appears to be old info that is no longer accurate. She also mentions living in the house and that would be personal use and then not considered an investment, so that is also not applicable for the subject case. And she says you can't deduct repair costs and generally can't add them to the basis of your home, which is different than what many of the responders say.
I would think the subject of this question would be extremely common since each year many people end up inheriting a home and sell it without using it personally. So I am not sure why the answers vary so much and why I can't find a citation that clearly states what is allowable, unless Pub 530 is determining and then it sounds like repairs are neither added to basis or selling expenses. This question has also been asked other times and even has other different answers, such as electing to capitalize repairs on unimproved and unproductive property, which also does not appear to apply since the subject property is a house and thus is improved property. It would be beneficial if this issue could be answered conclusively and with a citation. Does this forum have a process where someone can raise this question to a subject matter expert who specializes in this issue, or who as a contact in the IRS? That way we could get a conclusive answer with citations about the treatment of HOA fees, utilities, security and Homeowner's insurance costs and also the treatment of Repairs, Painting and Power washing (not part of an improvement). That way we don't have to keep looking at this question here and in other similar questions in the future, LOL! Or, since the original question is over a year old, should I restart it new and ask for a subject matter expert response? Thanks.
As far as utility expenses, HOA fees, repairs, pressure washing, insurance, etc. all of that is normal upkeep expenses of the estate. The estate pays for those things until the property is sold. None of that would be in the basis of the house. That is routine maintenance paid out of the estate. It is the fiduciary responsibility of the executor to sell things and distribute quickly, this is one of the reasons.
This is just a community forum. You have been answered by some of the oldest and wisest among us. I spend a week with the IRS each year. The laws change and inherited property is usually simple because a person inherits and sells fairly quickly so there is no profit in selling it soon after death. We don't really see people holding onto inherited property for a long time unless they were living there.
We see in Pub 551:
Settlement costs.
Your basis includes the settlement fees and closing costs for buying property. You can't include in your basis the fees and costs for getting a loan on property. A fee for buying property is a cost that must be paid even if you bought the property for cash.
The following items are some of the settlement fees or closing costs you can include in the basis of your property.
Abstract fees (abstract of title fees).
Charges for installing utility services.
Legal fees (including title search and preparation of the sales contract and deed).
Recording fees.
Surveys.
Transfer taxes.
Owner's title insurance.
Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions.
We also see:
Inherited Property
The basis of property inherited from a decedent is generally one of the following.
The FMV of the property at the date of the individual's death.
The FMV on the alternate valuation date if the personal representative for the estate chooses to use alternate valuation. For information on the alternate valuation date, see the Instructions for Form 706.
The value under the special-use valuation method for real property used in farming or a closely held business if chosen for estate tax purposes. This method is discussed later.
The decedent's adjusted basis in land to the extent of the value excluded from the decedent's taxable estate as a qualified conservation easement. For information on a qualified conservation easement, see the Instructions for Form 706.
If a federal estate tax return doesn't have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes.
For more information, see the Instructions for Form 706.
What is the case for a second home with considerable renovations?
Do I manually adjust the value of the old home on the 1099S ?
Thanks
Yes, you would increase the basis. Do not change the sales price as you want your return to agree with the 1099-S.
I sold inherited land. Value at date inherited is $10000. To get it sold I needed to get a survey and testing for approval for installation of a septic system-- costs of $2300. Do I just list the basis on form 8949 as 12300? Or is it more complicated than that?