Cost basis of inherited 2nd home retained in estate with secondary decedant

[ToutTennis]

22 years ago my father remarried with a pre-nuptial agreement which had a 2nd home condominium (which he fully owned) excluded from his wife with respect to possession, but it stated that if he died prior to her, she was allowed to live there until her death.  Less than 4 years after their marriage my father passed away with a will which gave this 2nd home condo to me.  The wife lived there as her primary residence while paying all expenses, and I was never able to step foot in it, so for 18 years she lived there without paying any rent to me.  In early 2020 she passed away and then that condo became my 2nd house.  In a rush to unload it I sold it mid-2020 at less than fair market value.

I am trying to determine my cost basis.  There are so many IRS phrases which seem to apply here.   IRS publications talk about date of death of ‘the decedant’ but I am not sure who should be considered the decedant in this case.  I did not enjoy use of the property, and I was not compensated.  What is the date of ownership/acquisition?  What is the date of inheritance?  Is the condo part of some kind of ‘life estate’?  Is the wife considered a ‘life tenant’?  Is the condo part of an implied trust?  Does the date of the wife’s death constitute the termination of a continued estate or the end of a testamentary trust?  Is the condo considered a ‘restricted property’?  The concept of using FMV for valuation of a ‘restricted property’ is discussed in IRS p551;  my situation is not one in which the property is received as a form of payment, but use of the condo was certainly restricted and does not become fully ‘vested’ until the end of the term of the life occupancy.  I use TT Premier, and I have seen another post which recommends entering “inherited” in the date-acquired field – should I do that?  But then I believe TT will ask who the decedant was – what is the answer to that?

I have searched Turbo Tax forums and other areas of the web for answers but I cannot find anything which pinpoints the nuances of this situation.  Thank you for any help.

[Anonymous_ · Accepted solution]

This scenario is actually not at all complex; your father's wife had a life estate with you as remainderman. 

As a result, you attained full ownership (in fee simple) when your father's wife passed. On that date you took the property with a basis stepped up to its fair market value on the date of death of your father's wife.

If you enter "inherited" as the date acquired, that will give you a long-term holding period which is the correct treatment for property acquired from a decedent.

[ToutTennis]

Thank you for the prompt response, Tagteam.  Your solution seems simple and fair.  However those 2 words are not frequently associated with dealings with the IRS, so please allow me to tie up any loose ends.

Due to favorable market conditions over the past 20 years the condo was valued much higher at time of sale than at the time of my dad’s death. The “uniformity in reporting basis” clause(s) keeps pointing to the date of death of “the decedant” to determine basis, and also in IRS p551 it states:

   “The basis of property inherited from a decedent is … The FMV of the property at the date of the individual's death.”  In all I have researched on this issue, the use of the phrase “the decedant” and “the individual” never specify for a situation where the death of a “second decedant” (i.e. the second wife) becomes the trigger date.  Can you cite an IRS publication or code (or anything else) where the date of the wife’s death would match to the person the IRS is looking at?

Also, the estate tax exclusion at the time that he passed away was much lower than 2020 when the wife died, so do we get to “step up” all matters related to inheriting the condo -- including the estate tax exemption amount -- to the year of the wife’s death?

I received a 1099-S for proceeds from the sale.  When entering into TTx Premier the output to the 1099-B worksheet shows “No Financial Institution.”  Should I manually change that on the underlying form(s) and also input the tax ID number of the institution which handled the transaction and sent me the 1099-S?