inherited home sale

[cguerrant]

When my mother passed away in September, 2019, the will divided everything evenly between my 2 sister and myself. This included the house she had bought so my daughter and grandchildren would have a home when she divorced. I bought my sisters out and had the home in my name with my daughter paying rent. My daughter  passed away on August, 2021, and I sold the house. Do i pay capital gains on this sale? I had to spend a lot of money to get the house in condition to be sold. Can I deduct those expenses from the profit? My 2 teenage grandchildren were placed in Kinship Foster Care and have been living with me since August, 2019. All profit is going to college funding, which starts Fall, 2023.

[DavidT0202]

Hi @cguerrant 

I am sorry to here about all of your hardships.  There is a lot in play here so I will do my best to answer everything. 

If you were renting the house to your daughter, were you claiming the property as rental property for tax purposes?  If yes, then you are on the right path.  If no, I would consult an attorney about how to fix this with the smallest tax liability. 

When you sold the home, if it was listed as rental property, you will have to report it as a capital gain.  You are allowed to offset the sale proceeds by adding in sale expenses.  If you put work into the house before selling it, these too can be added to the basis of the property to help offset profits.

I do wish you the best of luck and if we can help further, please let me know.   

[NateTheGrEAt]

Hi @cguerrant - thanks for your question and sorry to hear about your loss. 

It sounds like you could have a taxable capital gain on the house. Unless you lived in the house for two years prior to selling it, you don't qualify for the Section 121 (principal residence) exclusion. It sounds like your daughter and granddaughters may have lived in the house, but it was not your principal residence.

Your basis in this house would be 1/3 of the Fair Market Value in September 2019 (your share, when you inherited it) plus the amounts you paid your two sisters to purchase their shares, plus any capital improvements done to the house that you paid for. 

To calculate capital gains, take your sales price, subtract your basis and any selling costs (such as broker fees and title charges). 

The use of proceeds does not impact the capital gain tax treatment. 

I hope this information is helpful!