FMV of Inherited House but with a twist

[Candymancan]

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?

[tagteam · Accepted solution]

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.

[Mike9241]

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

[Candymancan]

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.  

[Candymancan]

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...

[tagteam]

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).

[Carl]

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.

[tagteam]

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@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.

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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.

[tagteam]

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@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.

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@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.

[rjs]

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@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...

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@Candymancan 

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.

[Opus 17]

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.

[Hal_Al]

https://www.irs.gov/faqs/interest-dividends-other-types-of-income/gifts-inheritances/gifts-inheritan...)).

 The basis of property inherited from a decedent is generally one of the following:

• The fair market value (FMV) of the property on the date of the decedent's death (whether or not the executor of the estate files an estate tax return (Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return)).
• The FMV of the property on the alternate valuation date, but only if the executor of the estate files an estate tax return (Form 706) and elects to use the alternate valuation on that return. See the Instructions for Form 706.

@tagteam  said "Note that improvements (also in the form of remediation) can be added to the basis of the property".

[Opus 17]

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.

[Carl]

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.

[tagteam]

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@Opus 17 wrote:

Improvements add value to the property......”

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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).