If a spouse dies & 8 years later, you sell the vacation home that you built. Do you file as purchase or inheritance & do you use cost basis or actual cost?

[terri-mcguire]

I purchased property and built a vacation home.  My spouse died in 2010.  We are a community state so I became sole owner.  I sold the home in 2018 and need to claim.  Do I claim as purchase with costs, or inheritance with an adjusted value on value of home in 2010? 

[DanielV01 · Accepted solution]

You claim the inherited value in 2010, plus additional costs that add to the stepped-up basis incurred after 2010.  While many tax matters for community property are complicated and potentially detrimental on a tax return, this aspect of the law is actually easier in your situation.  Here's an illustration:

Your original cost for the home when you built it was 200,000.  By the time your spouse passed in 2010, it had increased in value to 300,000, and afterwards had 50,000 in additional expenses that add on to the basis of the home.  Your basis in the home is 350,000, which is the stepped up basis plus the additional expenses that add to the basis.  

This article does a deeper dive, on the subject and discusses the difference between the community property and separate property treatment of stepped up basis:  https://www.cpajournal.com/2017/08/18/greatest-hits-community-property-step-basis/