Mom died last year. Her home was sold out of the estate for $295k, and the proceeds were evenly distributed between my two siblings and myself. I received a 1099-S from the title company for my 1/3 of the proceeds. Since it was reported to the IRS, do I need to report the gain as income on my tax return?
Yes. Just like your W-2 and other types of income are reported to the IRS and are still included in your return, the same applies to this income.
Your basis will be one-third the Fair Market Value on the date of death. You may not have a gain, but you must still report it due to receiving a 1099-S.
Interesting, since I read an answer to a similar question that stated this:
"Since the property was sold while it was in the estate, proceeds of the sale distributed to beneficiaries is not taxable."
I am asking because I actually received the 1099, and can't find a way to report it on my taxes without having to pay taxes on the gain.
We used money from my mother's cash assets to make improvements on the home before we sold it, so the difference between the fair market value at her time of death and the sale price is significant.
If you received a 1099-S for the sale of your mother's house you report as the basis in the house the Fair Market Value as of the date of death plus any improvements you made to the property and selling expenses.
Can I include the cost of the improvements to the home in the selling expenses?
No, you can not include the cost of improvements as a selling expense. If the improvements were a capital improvement they would be added to the adjusted cost basis of the home. If they were considered normal repairs or maintenance they are not deductible.
According to the IRS, capital improvements have to last for more than one year and add value to your home, prolong its life, or adapt it to new uses. ... The IRS describes repairs as things that are done to maintain a home's good condition without adding value or prolonging its life.
So, I am told (by a tax professional) that I should not owe taxes on inherited property "if the taxes are done correctly". But I received the 1099-S, so I have to file form 8949. On form 8949, accounting for the FMV and cost of improvements in column (e) and the selling costs in column (g), I have a gain of $1,649. How do I NOT pay taxes on that? The instructions say to write in "inherited", but it doesn't say that exempts the gain from being taxed.
Since you received a 1099-S you must report it on your return. A couple of items to look at.
1. Be sure the 1099-S only includes your share; many times all owners get a 1099-S for all the proceeds. You only need to report your share.
2. Get a good FMV of the property on the date of death (appraisal, comparable sales). Was the FMV really that much lower than the sale price within a year so that you had that much gain after improvements and selling expenses are added in? Usually these things are a wash in such a short time. I feel pretty certain that your tax professional is speaking of this item.
3. Everything needs to be in terms of your share. Your share of the FMV and improvements and selling costs vs your share of the selling price.
4. Do keep in mind that if there is a gain it will be long term as inherited.
Are you saying that if there is in fact a gain, that it is taxed, even though the property was inherited? That the only reason for not owing tax on an inherited property is if there is no gain?
Yes, the 1099-S only shows my third of the proceeds. I do have a gain because we made significant improvements to the property at low cost because my brother did most of the work.