Capital gains after an inheritance

[Upstate19801310]

My sister and I inherited a home, which we then sold for a small profit, so we will owe capital gains. If we reinvest that profit in a new home within one or two years from the date of sale, do we still own capital gains? 

[ReginaM]

I am sorry about your Mom,

Was the house you inherited and  sold you and your sister's primary residence?  Here are the  general rules listed in IRS Publication 523

• You owned the home,
• It was your main home for two years or more within the five years leading up to the sale,
• You waited at least two years between selling your primary home and excluding your first $250,000 or $500,000 from taxes. In other words, you may buy and sell as many primary homes as you'd like, but you'll only get this tax benefit every two years.

If so, you would be eligible for the exclusion.  

Please note, there are a number of exceptions to the general rules listed in the Publication you may want to review.  

If you Inherited the house, you would report the proceeds from the sale of your moms home by following these steps:

First, you need to determine what your basis is in the property.  It is either:

• The Fair Market Value of the property on the date of your moms death, or
• The Fair Market Value of the property on an alternative date, but only if  the executor of the estate filed an estate tax return (Form 706) & elects to use the alternative valuation on that return.

For more information, see IRS Publication 559, Survivors, Executors & Administrators.

To add this to TurboTax, follow these steps:

1. While in your Tax Home,
2. Select Search from the top right side of your screen,
3. Enter Sale of Second Home,
4. Select Jump to Sale of Second Home,
5. Here is how you will enter the sale of the house,The Fair Value of the house is split between you and your siblings, as are the proceeds.

[Anonymous_]

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@Upstate19801310 wrote:

If we reinvest that profit in a new home within one or two years from the date of sale, do we still own capital gains? 

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Yes, and you are probably thinking about the old rule which allowed taxpayers to defer capital gain if they purchased a replacement home within two years before or after the date of the sale. However, the Taxpayer Relief Act of 1997 eliminated that rule.

Now, if you own and use a dwelling as your primary residence for two out of the last five years leading up to the date of the sale, you can exclude up to $250,000 in gain ($500,000 if married filing jointly).

See https://www.irs.gov/taxtopics/tc701

Also note that the basis in the home you inherited is likely to be the fair market value as of the date of death of the decedent. Assuming that is the case, you would only have a gain if your sales price (less selling expenses) exceeded that basis.