My father in law passed away at the end of August 2021. Unfortunately, due to COVID and a backlog at the medical examiner's office, we did not receive the official death certificate until early March of 2022. Not only that but due to the situation of the death, the house had to be completely disinfected, all mobile items removed, and carpet removed. It was then disinfected, repainted and new carpet was installed. It was put on the market on July 8 and was sold just last week. The settlement date is July 29, 2022.
My question is for tax purposes, would the FMV be the sold price? The big issue is that we have was the backlog of getting the death certificate and I have emails to a US Senator asking for help in the matter because we were told it could take up to a year to get the death certificate. That office is notorious for being understaffed and I have articles pointing that out prior to COVID.
The reason why I'm hoping that we can use the sales price as the FMV is that the market in that area spiked within the last 3 months. The house on Zillow went from $205K to $260K. The 260K is what the house sold for.
Any thoughts? Suggestions?
Per Section 1014, the basis is the fair market value on the date of death (August of 2021 - assuming the house was part of the decedent's estate at death and an alternate valuation cannot be used, both of which would be unusual).
See https://www.law.cornell.edu/uscode/text/26/1014
Note that improvements (also in the form of remediation) can be added to the basis of the property.
Per Section 1014, the basis is the fair market value on the date of death (August of 2021 - assuming the house was part of the decedent's estate at death and an alternate valuation cannot be used, both of which would be unusual).
See https://www.law.cornell.edu/uscode/text/26/1014
Note that improvements (also in the form of remediation) can be added to the basis of the property.
sorry for your loss. the tax laws say the FMV is determined on the date of death. there is no adjustment because it took a long time to get the death certificate or other paperwork so you could sell it. most of the expenses you cite would not add to its basis or be deductable as selling expenses. the carpet may qualify
from IRS PUB 523
Examples of Improvements that increase basis - Wall-to-wall carpeting
What changed? I've been reading posts that you replied to in the past on the same subject and you mentioned that within 6 months is okay. The problem is now paying for someone to appraise it to "roll the dice" on what they come up with. It could really hit us tax wise if the person has a low number. The house was paid off by my father-in-law and my wife was the sole executor but we could not do anything regarding the sale of the house until the cleaning was done and we received the death certificate. The things you stated, I'm confused with. I apologize but don't understand why they would be "unusual". I don't understand that.
If audited, you don't think we have enough information or supporting documentation that we couldn't do anything regarding the house until we received the death certificate as well as the restoration part? Sounds to me the IRS just wants to tax everyone then because if the house was up for sale the day after the death and took 1 month to sell it but the price went up, you owe taxes.
Sounds like a big risk in getting an appraisal, especially if it doesn't go in the right direction. They allow you a deduction if the market falls but could care less if the market goes up. I'm not trying to do anything illegal but it seems very unfair that we had no control over getting ownership of the house (death certificate required) until 7 months after the passing and we literally had the house for sale within a few months of getting the death certificate.
My point is that we would have sold it sooner rather than later if we could have and now we're going to pay a ridiculous amount of tax on it as well as I'm screwed now because I already contributed my to my Roth IRA and this will put us over the income limit - which was not my fault. No planning would have avoided that. We expected to sell the house for $220K and by the time we had everything done and go to go, the market had it at $260K. What a wonderful stupid country we live in. Getting penalized now for trying to save for retirement and now "we make too much". Please we're no where near rich but the IRS thinks I am...
If you sold the house for $260,000, then you would subtract your selling expenses and the result would be your amount realized.
From your amount realized, you would subtract your basis to arrive at your gain on the transaction. Your basis would be the fair market value on the date of death (August of 2021) plus the cost of any improvements made.
I am not sure what part of the foregoing you are having difficulty comprehending and/or what you feel is unfair about that formula (it is essentially the same for everyone subject to this fact pattern).
The the law is clear in that the inherited value of the house is the FMV on the date of death. Period. Now it used to be that proof of value would be an appraisal that was two or less years prior to or after death. I've not seen anything "official that changed that. Though I have "heard through the grapevine" (i.e.; rumour) that an acceptable appraisal needs to be (note "needs to be" not "has to be") within 6 months either side of the owner's death.
Now if you sold it through a real estate agent or agency, that agent or agency did whats called a "comparative analysis" of similar homes within the same area that were sold within the prior year in order to come up with a realistic "value" for selling that property. That comparative analysis, which you should have a copy of, is generally enough to substantiate your cost basis should you ever be audited on it.
Now most likely you sold it for less than your original asking price. So using that original asking price or the price you actually sold it for would be acceptable as your cost basis. Note that if you use the original asking price as your cost basis and sold it for less than that, then your "loss" would not be deductible. You just wouldn't have any taxable gain on the sale is all.
@Carl wrote:
Now it used to be that proof of value would be an appraisal that was two or less years prior to or after death. I've not seen anything "official that changed that. Though I have "heard through the grapevine" (i.e.; rumour) that an acceptable appraisal needs to be (note "needs to be" not "has to be") within 6 months either side of the owner's death.
None of that is accurate.
There never was a law, rule, or regulation stating that "proof of value would be an appraisal that was two or less years prior to or after death".
There is also no law, rule, or regulation stating that an acceptable appraisal needs to be done "within 6 months either side of the owner's death". An appraisal that the IRS will accept is one that appraises the property at its fair market value on the date of death.
@Carl wrote:Now most likely you sold it for less than your original asking price. So using that original asking price or the price you actually sold it for would be acceptable as your cost basis.
@Candymancan stated the exact price for which the property was sold ($260,000) and that price would not be acceptable as the basis for the property.
Again, the fair market value on the date of death (plus the cost of any improvements made) would be the basis for purposes of calculating gain on the sale.
@Candymancan wrote:
My point is that we would have sold it sooner rather than later if we could have and now we're going to pay a ridiculous amount of tax on it as well as I'm screwed now because I already contributed my to my Roth IRA and this will put us over the income limit - which was not my fault. No planning would have avoided that. We expected to sell the house for $220K and by the time we had everything done and go to go, the market had it at $260K. What a wonderful stupid country we live in. Getting penalized now for trying to save for retirement and now "we make too much". Please we're no where near rich but the IRS thinks I am...
The fact that you were delayed in selling the house has no bearing on determining the fair market value or the gain. But you are not being penalized. You are actually coming out ahead. You got $40,000 more for the house than you expected, and maybe a total profit of $55,000 if the Zillow estimate is accurate. You only pay tax on the profit that you actually received. Some of that profit goes to pay the tax, but you get to keep the rest. And you are paying tax at a lower rate because the profit on the house is a long-term capital gain.
For 2022 the top of the AGI phase-out range for making a Roth IRA contribution is $214,000 for married filing jointly. If your income is over $214,000 you may not be rich, but you are doing fairly well. Yes, your AGI includes the profit from selling the house, but that is additional income that you actually received. You are not paying tax on phantom income. It's like getting a big bonus from your job, but with the additional benefit of the lower tax rate.
If you did contribute more to your Roth IRA than you are allowed to, you have until next April 15 to withdraw the excess contribution (including earnings) to avoid any penalty. Contact the IRA custodian about withdrawing the excess. If your income is lower next year, you will be able to continue contributing to your Roth IRA.
The fair market value on a date of death is what the property would have sold for on the date of death. Period.
There has never been an official rule or policy about getting an appraisal or selling the house within a specified time period. We have said before that as a rule of thumb, if you are in a stable real estate market and you sell the home within a reasonably short period of time after the person’s death, the IRS is likely to allow you to use the selling price as the fair market value. But this has never been an official rule, and the real estate market lately is most definitely not stable.
If a reasonable fair market value at the time of death was $220,000, then you could have sold the home for $220,000 and not realized any taxable gain, and I’m sure the buyer would’ve been overjoyed to get a bargain. If you made an unexpected profit because the real estate market is hyperactive, then you will pay income tax on that unexpected profit, but you are still going to come out thousands of dollars ahead of where you would have been had you sold the home for $220,000.
The basis of property inherited from a decedent is generally one of the following:
@Anonymous_ said "Note that improvements (also in the form of remediation) can be added to the basis of the property".
Improvements add value to the property or extend the useful life of the property or its “systems.” Repairs and maintenance keep the property in as-is or as-was condition. Repairs and maintenance are ordinary responsibilities of every property owner and there are no special tax considerations for repairs and maintenance. If you needed to perform extensive cleaning because the property was in poor condition, that is unfortunately the responsibility of the prior owner and you don’t get a tax consideration for it. The only thing you listed that would count as an improvement is replacing the carpet, because new carpet adds value to the property and extends the useful life of the “flooring system.” (You may have made other improvements that you did not list.)
“Staging“ can be considered a selling expense along with the real estate commission and certain other fees, which reduces the selling price and reduces your capital gain. The difference between “staging” and maintenance is that staging must not make any changes to the home. For example, paying someone to bring in temporary furniture for an open house, which is later removed, would be considered staging. But the cleaning and painting that was also necessary for the open house does not count as a selling expense or as staging because it makes changes to the property.
Repairs and maintenance are ordinary responsibilities of every property owner and there are no special tax considerations for repairs and maintenance.
The reason this is true in this case is because the repairs/maintenance was not done between renters. It was done after the last renter moved out prior to the sale.
@Opus 17 wrote:
Improvements add value to the property......”
We can argue this "improvement" point into eternity, but one thing is for certain; the "add value" language is not a part of the equation. In other words, an improvement can actually devalue the property and still be considered an "improvement" for income tax purposes. The word "value" was inserted quite some time ago by a member of this board without any reference as to where, exactly, the word appears in connection with "improvement" in the Code, Regulations, or Rules.
I have about a million examples of the foregoing, but setting forth just one would be adding an olympic-size, outdoor swimming pool to a 2-bedroom house in Fairbanks, Alaska. The cost of that "improvement" would be added to the basis of the house but would not only not add "value", but it could also actually make the property less valuable or even unsaleable.
Here, we have an estate and property held therein. As a result, Section 1.67-4 applies and, from the stated facts ("...due to the situation of the death..."), the costs incurred might not have been incurred had the property not been held in the estate. In other words, the "situation" occurred because of the death in the house and could not be remediated in a timely manner as a result of being held by the estate (rather than an individual who could have addressed the situation earlier).
[With respect to expenses that may be related to "improvements", see also Section 1.263(a)-3(g)(1)]
In the end, all we have are opinions and nothing more, including at least one earlier post which appears to be cut from whole cloth with absolutely no authority cited and, seemingly, consisting of language fabricated by what the poster felt "sounded good" (but which is almost absurd on its face).
@Carl wrote:
Repairs and maintenance are ordinary responsibilities of every property owner and there are no special tax considerations for repairs and maintenance.
The reason this is true in this case is because the repairs/maintenance was not done between renters. It was done after the last renter moved out prior to the sale.
There is no indication, anywhere in this thread, by @Candymancan, that the property was held for rental use nor rented at any time.
On a somewhat unrelated point, if real property is held for rental use, then just because a renter moved out does not necessarily dictate that a true repair cannot be deducted an expense. If the property continues to be available for rent, such expenses can be deducted.
The actual final rules are here.
https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations
An improvement is characterized as a betterment, an adaptation, or a restoration. I suppose I was lazy in saying an improvement "adds value", but that's a shortcut for "betterment" which is a bit harder to define. @Carl 's example of an in-ground pool would be an adaptation to a new use even if it doesn't raise the property value.
What surprised me in reading this was the definition of "restoration" as an improvement that is added to basis. The example the IRS gives (farm outbuildings) applies to commercial property, but the rules should apply equally to personal property like a home. Then the question would be, was the work needed to be done on the house sufficient to count as restoration, or as repairs. I think if you want to call the work a restoration, you would want the support of a local accountant. My lay opinion is that the work @Candymancan described was not extensive enough to count as restoration (I'm thinking, restoration after a fire or flood), but that can be reviewed by a local expert if they want to claim it.
@Opus 17 wrote:
The actual final rules are here.
https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations
That link does not contain the actual final rules but, rather, a summary written by who-knows-who at the IRS. The Regulation that would be directly applicable in this instance, with respect to improvements, would be 1.263(a)-3(g)(1).
(i) In general. A taxpayer must capitalize all the direct costs of an improvement and all the indirect costs (including, for example, otherwise deductible repair costs) that directly benefit or are incurred by reason of an improvement. Indirect costs arising from activities that do not directly benefit and are not incurred by reason of an improvement are not required to be capitalized under section 263(a), regardless of whether the activities are performed at the same time as an improvement.
(ii) Exception for individuals' residences. A taxpayer who is an individual may capitalize amounts paid for repairs and maintenance that are made at the same time as capital improvements to units of property not used in the taxpayer's trade or business or for the production of income if the amounts are paid as part of an improvement (for example, a remodeling) of the taxpayer's residence.
The issue might then be whether the amounts spent (in total) constitute a "remodeling" which, of course, is nowhere defined.
@Opus 17 wrote:@Carl 's example of an in-ground pool would be an adaptation to a new use even if it doesn't raise the property value.
That was my example to illustrate that an "improvement", "betterment", "adaptation", et al does not necessarily require that an appraiser, for instance, would appraise the property at some increased "value" in order for it to qualify for federal tax purposes. The cost is the cost and that cost can be added to the basis regardless of whether the property's "value" is increased.
@Opus 17 wrote:My lay opinion is that the work @Candymancan described was not extensive enough to count as restoration (I'm thinking, restoration after a fire or flood), but that can be reviewed by a local expert if they want to claim it.
I agree that a local expert should be consulted to review all of the facts surrounding this scenario.
My opinion would be that Section 1.67-4 could apply in the sense that the costs might not have been incurred if the property were not held in the estate (e.g., @Candymancan indicated that the expenses were incurred "due to the situation of the death"). However, it is difficult to provide a firm opinion without knowledge of all of the relevant facts.
Regarding the Roth IRA contribution that is an excess contribution due to being over the MAGI limit, instead of obtaining a return of contribution you can instead ask the custodian to recharacterized the contribution to be a traditional IRA contribution instead, which may or may not be deductible.
While the IRS summary might have been written by "who-knows-who", it's a summary of the actual rule making that was published in the Federal Register.
@Opus 17 wrote:
While the IRS summary might have been written by "who-knows-who", it's a summary of the actual rule making that was published in the Federal Register.
The summary is just that and nothing more, regardless; the Code and Regulations take precedence.
The order of precedence is not generally dependent upon the method, mode, and nature of publication. The summaries (and instructions) are published in an effort to make the legislation and regulations more easily comprehensible to lay people.
gain on inherited property is always a Long Term Capital gain.
after subtracting closing costs, broker commissions and remediation,
your taxable amount should not be oppressive.
Thank you to all that have replied. It's most appreciated. The cleaning and the disinfecting of the house, by biohazard professionals was done because unfortunately, my father-in-law passed away and it was a few days before we were called that he passed away. Without going into details, he did not use air conditioning and it was in the middle of summer (80-90 degree and humidity). The house had an odor and many flying insects in the house. Once we called in some specialists to look at it, the house was deemed unlivable and a bio-remediation and sanitizing/disinfecting effort had to be done. They used biohazard suits...etc. due to the airborne bacteria. I even got sick for a few days afterwards as I did some work there before the specialists showed up but kept my wife and mother-in-law out of the house. After the clean-up was performed, the walls/ceiling were painted to provide a proper seal as well as new carpet installed.
Many folks mentioned our realtor providing a comparative analysis. Would that be enough eventhough that would have been done in the May/June timeframe in 2022 vs time of death in late August. Or would the value have to be done on properties in the area sold in the 1/2 half of 2021?
That's my last question. Again thank you all for your replies.
@Candymancan wrote:
Many folks mentioned our realtor providing a comparative analysis. Would that be enough eventhough that would have been done in the May/June timeframe in 2022 vs time of death in late August. Or would the value have to be done on properties in the area sold in the 1/2 half of 2021?
It's best to have an actual appraisal. A professional real estate appraiser can give you a retroactive appraisal as of the date of death. The retroactive appraisal will cost a small amount more than a current appraisal.