How to determine cost basis of second home - fractional ownership

[TWW]

Hello - I am trying to determine a cost basis for a home that we are selling. The home is owned by 5 people at 20% each. In 1994, my wife and sister-in-law were each gifted a half-share of 10% in the home. Let's assume that the value of the home at that time was $200,000. My wife inherited another 10% of the house when her mother passed away last year. Let's say the fair market value of the home was $800,000 at that time in 2020. How do we figure the cost basis if we sell so that we can correctly report the sale to the IRS? We currently own 20% of the home and it has been titled under our trust. 

[tagteam]

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@TWW wrote:

....In 1994, my wife and sister-in-law were each gifted a half-share of 10% in the home. Let's assume that the value of the home at that time was $200,000. 

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For this 10% interest, your wife's basis will depend upon whether the fair market value of her share of the property at the time of the gift was less than the donor's adjusted basis.

See https://www.irs.gov/faqs/capital-gains-losses-and-sale-of-home/property-basis-sale-of-home-etc/prope...

More likely than not, your wife will use the donor's adjusted basis in the property (i.e., a carryover basis) for this 10% interest.

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@TWW wrote:

....My wife inherited another 10% of the house when her mother passed away last year....

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The basis for this (inherited) 10% interest is the property's fair market value at the time of your wife's mother's passing.

[TWW]

So - following the example, the total tax basis would be 10% x 200,000 plus 10% x 800,000 = 100,000, correct?

[tagteam]

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@TWW wrote:

So - following the example, the total tax basis would be 10% x 200,000 plus 10% x 800,000 = 100,000, correct?

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Correct on the 10% of $800,000 but you need to know your wife's mother's adjusted basis at the time (in 1994) she made the gift to your wife.

You, apparently, know the fair market value at the time of the gift but, typically, the donor's adjusted basis is less than the fair market value in this type of transaction. If that is the case here, then your wife's "gifted basis" in 1994 would her mother's adjusted cost basis (i.e., a carryover basis).