Inherited property turned into rental property and now sold

[sadenhup01]

Our mother passed away on October 16, 2018.  My sister, son and I inherited her home.  The house appraised in January 2019 for $485.000.  My son lived in the home all of 2019. In March of 2020 the property became rental property until March of 2022.  This property was sold on June 8, 2022.  Alot of questions here.

Yes rental income (divided by 3) for 3 months of 2022.

Yes check the rental property was sold in 2022.

Yes do "Rental Income"

Yes do "Sale of Property/Depreciation".

Here's the big question:  Do we report the sale of this property under "Investment Income" because it was inherited property and sold? Capital gains/loss ?

Thank you,

[JamesG1]

The property was inherited in 2018.  The basis is likely $485,000.  See IRS Publication 551 page 10.

Inherited Property 

The basis of property inherited from a decedent is generally one of the following:

The FMV of the property at the date of the individual's death......

In 2020 the property was converted to rental property.  The asset was depreciated and rental income was reported on Schedule E.

See also IRS Publication 551 page 10 Property Changed to Business or Rental Use.

You will report the sale of the rental property by selecting The item was sold, retired, stolen, destroyed..at the screen Tell Us More About This Rental Asset.  The gain or loss will be reported on Part I and Part III of IRS Form 4797 Sale of Business Property.  Depreciation previously taken will be recaptured.

[sadenhup01]

Thank you but still have a question:  "Do we report the sale of this property under "Investment Income" because it was inherited property and sold? Capital gains/loss ?" 

Thanks

[DianeW777]

No, it will not be sold as investment property on your tax return. You converted the property to rental after it was inherited. At that time the depreciable cost basis should have been the value on the date of death.  A figure would have been used for land as well.  You did all the right steps to sell the rental property and it will end up as capital gain carried first to the Form 4797 and then to Schedule D.   You should answer 'No' to 'Special Handling'.

The depreciation recapture will be taxed at 25% and the remaining gain will be taxed at 0%, 15%, or 20% depending on your overall income level.  See the information below.

• A capital gain rate of 15% applies if your taxable income is more than $41,675 but less than or equal to $459,750 for single; more than $83,350 but less than or equal to $517,200 for married filing jointly or qualifying surviving spouse; more than $55,800 but less than or equal to $488,500 for head of household or more than $41,675 but less than or equal to $258,600 for married filing separately.
• However, a net capital gain tax rate of 20% applies to the extent that your taxable income exceeds the thresholds set for the 15% capital gain rate.

There are a few other exceptions where capital gains may be taxed at rates greater than 20%:

1. The taxable part of a gain from selling section 1202 qualified small business stock is taxed at a maximum 28% rate.
2. Net capital gains from selling collectibles (such as coins or art) are taxed at a maximum 28% rate.
3. The portion of any unrecaptured section 1250 gain from selling section 1250 real property is taxed at a maximum 25% rate.

You must calculate the building vs land sales price and selling expenses. You can use the city or county tax assessment as a way to know the amount for each.