1099 for sale of deceased mothers house

[Jodielynn]

My mother filed a quitclaim deed on her home to my sister and I around 9 years before her death. She had a life estate and lived in the house until she died. She passed away 7/22/22, and we sold the house 1/13/23. I am wondering how I go about presenting this on my 2023 taxes, as I am told that this would not be taxable.

[RyanH5]

Assuming that you and your sister did not live in the house for at least two out of the five years prior to selling it, you will both likely have a tax liability from the sale of the house. This is because the deed was transferred to you before your mother passed and would be considered a gift, rather than inheritance.

Since you owned it for around 9 years, it will qualify for the preferential capital gains tax rates. The amount of gain that will be taxable will be determined by subtracting the adjusted basis from the sales price.

Yours and your sisters adjusted basis would be your your mothers original cost of the home, plus any improvements (not including normal repairs and maintenance, plus certain closing costs.)

[Jodielynn]

Neither my sister or I have lived there for many years (over 30 years). My sister's tax person told her that since it was a life estate and my mother lived there until she passed away, it would not be taxable. Could that be correct?

[RyanH5]

If the life estate was properly established and the title did not pass to you and your sister until her death, then your basis would be stepped up to the fair market value on the date of her death.

You would still have to claim the sale on your tax return. If the sales price was higher than the fair market value when your mother passed away (i.e. the property value went up in that short time) then  you would still have a taxable gain.

If the sales price is equal to the fair market value at the date of death (i.e. it did not appreciate in that short time) then there should be no taxable gain.