My wife and I purchased a house in California in 1989 for $149,500. My wife passed away in April of 2011, at which time the house had a Fair Market Value of $284,000. My wife had a Schedule C business with an office in the house for 8 years prior to her death. She took the Business Expense for the office space. I only took the Business Expense for the 3 months it was used the year of her death. Nothing since. I sold my home in 2020 for $510,000.
Should I enter the Fair Market Value at the time of my wife's death for Original Cost?
If I'm entering the Fair Market Value as my Original Cost, am I correct to assume i do not need to address earlier Business Expense deductions?
If Original Cost is not Fair Market Value at the time of her death, how do I adjust the Cost Basis to get to the Fair Market Value?
@ImOverTaxes assuming that you are a California resident and the property was your main residence till you sold it then
(a) the basis in the property got a step-up to full FMV ( Fair Market Value ) at the time of death of your spouse
(b) you should be eligible to exclude gains up to 250,000 -- single filing -- if you have owned the property for at least two years and you have used it as your main home for at least 730 days -- 2 years-- when looking at five years back i.e. during the last five years starting from the day of the sale
Does that help or do you need more info etc. ?
Thank you for taking time to answer my post. I do meet the qualifications to exclude gains up to $250,000.
My questions are about clarity of instruction regarding where to enter the step-up to Full Market Value, and how Full Market Value affects adjustments.
IRS publications discuss using Basis, but Forms and Worksheets build Basis based on purchase price.
On the Adjusted Basis of the Home Sold Worksheet, line 1a reads: Enter the purchase price of the home sold.
Should I enter the step-up to Full Market Value instead of the original purchase price?
If not, where do I enter the step-up to Full Market Value?
As home depreciation for Business Expense occurred only before the step-up to Full Market Value, do I need to bother checking depreciation recapture?
Furthermore, should I only include improvements that occurred after the step-up date?
Any input would be appreciated.
I found my answer buried in the middle of IRS Publication 551 (12/2018), Basis of Assets.
Basis Other Than Cost
There are many times when you can't use cost as basis. In these cases, the fair market value or the adjusted basis of property may be used.
Obviously, the IRS realizes this is important enough that they state it here, but not important enough to reference this abstraction versus the well defined term "purchase price" in their forms and worksheets when calculating adjusted basis.
@ImOverTaxes that is what I meant in my reply but please note :
(a) because you were/are a resident of a community property state, at the time of passing of your spouse , the step-up is on 100% of the property and not limited to 50% or ONLY the share of the departed
(b) the gain at the time of sale is Sales Proceeds ( Sales Price LESS sales expenses such sales commission, transfer tax , preparation costs strictly for sales purposes etc.. etc. ) LESS accumulated depreciation ( in your case sum of all the depreciation included / recognized for the business deductions in the past ) LESS your basis in the property ( already covered earlier ).
(c) the accumulated depreciation ( if you did not take the standard per sq. ft deduction for business use of home) equivalent of the gain is treated as ordinary gain and taxed at your marginal rate
(d) the rest of the gain is treated as capital gain and is eligible for exclusion because this was your main home ( to the max of $250,000 for a single filer as long as you meet the conditions earlier listed ).
Is there more I can do for you ?