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You owe capital gains tax on your gain, the difference between adjusted cost basis and selling price. In your case, each sibling reports 1/5 the selling price and 1/5 the cost basis.
The selling price can be reduced by certain costs of selling like transfer taxes, mortgage recording fees, and inspections or surveys you paid for as part of the sale.
Cost basis will be the problem. In the end, make the best good faith determination you can, but remember that if audited, the IRS does not have to credit you with any basis you can't prove.
The first thing you need to know is the form of the deed. If your father retained a "life estate"--the right to live in the home until his death, and you could not sell it before then--then you inherited the home, even though there was a quit claim deed in the past. You inherit a stepped-up cost basis; your cost basis is the fair market value of the home on the day he died. If you sold the home immediately, the FMV is probably the selling price. If there was a delay, you may need a real estate appraisal.
If there was no life estate, if you obtained the home "in fee simple", then your father gave you his cost basis, which is now your own.
His adjusted cost basis is:
His original purchase price plus original closing costs plus the cost of permanent improvements he made minus depreciation he took or could have taken for business use of the home (home office, rental). Then you can take a further adjustment for any improvements you and your siblings made after inheriting the home and before selling it.
An improvement is not a repair. An improvement adds value to the property or extends the useful life of the property or its sub-systems, and must be attached to the real property (land and anything permanently attached.) Things like an addition, a new roof, new furnace. If you made the same improvement more than once, like replacing the furnace, only count the one that is still part of the home. If you don't know the cost of improvements, you can estimate, but remember the IRS will not award any basis you can't prove. Any estimates are at your own risk.
If your father owned the home with a spouse who died before he did, then your father has another adjustment to his basis. If he did not live in a community property state, he inherited one-half the home when his spouse died and gets a basis adjustment. For example, the home was purchased for $20,000 and there was a $10,000 renovation to the kitchen. Your father and mother each had a $15,000 basis. When your mother died, the fair market value of the home was $100,000. Your father inherits half the house with a stepped up basis ($50,000) so his total adjusted basis is now $65,000.
If they lived in a community property state, he inherited the entire house will a fully stepped up basis at the fair market value. If you need the FMV for a past date like the date your mother died, a qualified appraiser can usually give a value based on historical sales records.
Then, whichever type of stepped up basis your father got, you would add any improvements he or you made after his spouse's death.
So your starting point is to answer the following questions:
1. Was the quit claim deed in fee simple or did he retain a life estate.
2. How much did he pay when he bought the house (find this in county records)
3. Did he own the home with a spouse who died before him? (you probably know this or it will also be in the county records)
4. What was the value of the home when his spouse died? (get an appraisal)
5. Did they live in a community property state?
6. What was the cost and date of any improvements? (estimate at your own risk)
7. Was the home ever used as a rental or home office (an account can estimate the amount of depreciation taken or you will need to review his past tax returns).
Hi Opus17. I appreciate your reply to the question on capital gains and cost basis. It's a challenge to understand cost basis and adjusted cost basis when gifted a house. You mentioned if a spouse dies, the surviving spouse, in a community property state, gets an adjusted cost basis at time of death. Did I understand this correctly? I live in CA. My parents bought a house for 100,000. Years later my dad died. The estate appraisal show the value was 250,000 at his death. My mom deeded/transferred the house to me for "no consideration" many years later prior to her death. Is my adjusted cost basis 100,000 (their purchase price) or 250,000 (FMV at time of his death)? plus improvements. Thank you and if you have any links on this, I'd appreciate it so much.
@mack12345 wrote:
Hi Opus17. I appreciate your reply to the question on capital gains and cost basis. It's a challenge to understand cost basis and adjusted cost basis when gifted a house. You mentioned if a spouse dies, the surviving spouse, in a community property state, gets an adjusted cost basis at time of death. Did I understand this correctly? I live in CA. My parents bought a house for 100,000. Years later my dad died. The estate appraisal show the value was 250,000 at his death. My mom deeded/transferred the house to me for "no consideration" many years later prior to her death. Is my adjusted cost basis 100,000 (their purchase price) or 250,000 (FMV at time of his death)? plus improvements. Thank you and if you have any links on this, I'd appreciate it so much.
In a community property state, the spouse inherits the full stepped up basis. The only exception seems to be if the property has more than two owners, so that the spouses own less than a half share each. So your mother's basis on the day of your father's death would be the full FMV at that time, then her basis is adjusted by any improvements until she gifted it to you, when her basis becomes your basis. Then your basis is further adjusted by improvements you made after that.
(Also note, that use of the home as a rental, or in business, or home office deduction, or claiming a casualty loss, can reduce your basis.)
See IRS publication 551
In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), married individuals are each usually considered to own half the community property. When either spouse dies, the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property. For this rule to apply, at least half the value of the community property interest must be includible in the decedent's gross estate, whether or not the estate must file a return.
https://www.irs.gov/publications/p551#en_US_201812_publink1000257014
Thank you! I really appreciate your reply!
Hello again. Revisiting this topic as now it is time to file taxes on the gifted property I sold. Does FMV at the time have any value. At time of gift, my mom's stepped up basis was 250,000. The FMV when she gift it to me was 460,000. If I understand correctly, my basis is her basis and not the FMV at time of gift. Thank you so much!
Hello again.
Revisiting this topic as now it is time to file taxes on the gifted property I sold.
Does FMV at the time of gift have any relevance/value? At time of gift, my mom's stepped up basis was 250,000. The FMV when she gifted it to me was 460,000. If I understand correctly, my basis is her basis, and unfortunately, it is not the FMV at time of gift.
Thank you so much!
@mack12345 wrote:
Hello again.
Revisiting this topic as now it is time to file taxes on the gifted property I sold.
Does FMV at the time of gift have any relevance/value? At time of gift, my mom's stepped up basis was 250,000. The FMV when she gifted it to me was 460,000. If I understand correctly, my basis is her basis, and unfortunately, it is not the FMV at time of gift.
Thank you so much!
Correct. When she gave you her property, she also "gave" you her basis. You do not get an adjustment for the FMV at the time of the gift.
(For this reason, such gifts should be reviewed with a tax planner ahead of time. There may have been a way to accomplish the same overall goal -- whatever that was -- with less tax.)
Thank you! You've been very helpful.
Opus17. You've been so helpful. I'm clear now on my cost basis. Thank you. The home I sold has been owned by me for many years. I married in March 2021; sold in Oct 2021. So my home was acquired by me before marriage. We do live in California. My spouse does not meet ownership or use requirement of the home I sold (he is not on deed) for capital gains exclusion. I meet it for the 250,000. Can we file married filing separately in California? Any special considerations? Are there any special rules for me regarding the 1099 and taking the 250,000 exclusion I qualify for on my MFS taxes. Does he have to record anything about the sale on his return? I appreciate your expertise
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