Need to figure adjusted cost basis for inherited property

[heather-marco]

My mother passed last year and we sold her condo shortly after. She had me on the title (in case she wasn't able to manage her affairs due to cognitive decline), so when it sold it seemed to make sense to just have it under my name.
But now I'm trying to finish our 2022 taxes and I'm working to figure out the Adjusted Cost Basis, particularly the section asking for a description of Increases to the cost of the home.

I may be reading it incorrectly, but would the current market value at the time of inheritance also be the increased cost of the home?

TIA, just trying to unravel it all.

[NCperson]

@heather-marco not necessarily.   Who technically owned this property?  You and your mother 50/50? 

[Mike9241]

sorry for your loss. you may want to confer with a real estate attorney in this matter. If your mother owned 100% the value (tax basis) for determining gain or loss would be the gross sales price since it was sold soon after her death.  There would likely be a loss because of closing costs and other expenses of sale. so the question is whether you can take the loss on your tax return.  however, if the legal ownership was 50/50 then 1/2 the sales price would represent the tax basis of her share that you inherited. the tax basis of your share would be the lower of 1/2 her tax basis or 1/2 the fair market value the date she gifted you ownership. I would assume that no gift tax return was filed which would have helped in determining the tax basis of your portion. 

[tagteam]

I am sorry for your loss and agree with @Mike9241 with respect to basis and professional advice.

Consult with a local tax professional and/or legal counsel. You may have an argument that your mother retained a life estate and you get a step up in basis of 100% (Section 2036).

See https://www.law.cornell.edu/uscode/text/26/2036

[heather-marco]

Thank you for responding and for your kindness.

Technically, it was myself, my sister, and our mother on the title. We provided the down payment for the purchase of the condo in September of 2020, but the loan was fully under our mother's credit. We hoped she would have at least a decade of enjoying her life there, so we were unprepared when her health deteriorated so quickly and she passed in June of 2022.

When the condo sold in August of 2022, it just seemed simpler to have the money sent to me since I had organized and paid for the memorial, so I'm the only one with the 1099-S. Obviously I'm realizing we should have structured it better, but it was all so overwhelming in the moment.

She still owed quite a bit on the mortgage, and since I was on the title from the beginning, I'm guessing I'll just have to treat it as a 2nd property? But we wouldn't have sold it had she not passed unexpectedly, so do I have a recourse to lower my liability?
Thanks again.

[NCperson]

@heather-marco let's try to frame up the liability with some numbers.  While I would also encourage seeing a lawyer, this would be a 'worst case' scenario.  Please enter the correct numbers. 

First, the mortgage has nothing to do with this.  leave it  out of the equation.

If you could post these numbers, I can show you how this works:

1) original percentage ownership for you and your sisiter and mother.

2) what was the purchase price?

3) what was the sum of any improvements during the owernship of the property?

4) what was the sales price? 

5) what were the selling expenses (think the commission)

6) what was the property worth on the day your mom passed?  did you have an appraisel done? 

from that I can piece this together. 

[heather-marco]

Hi NCperson,

Thank you for your continued feedback. The responses are as follows:

1) original percentage ownership for you and your sisiter and mother. - 33.33% each

2) what was the purchase price? - $155,000

3) what was the sum of any improvements during the owernship of the property? - $15,700

4) what was the sales price? - $232,000

5) what were the selling expenses (think the commission) - $23,054.25

6) what was the property worth on the day your mom passed? did you have an appraisel done? - I believe it was the same as the selling price, $232,000.

[NCperson · Accepted solution]

@heather-marco here is how it works.  

1. the Cost Basis is $155,000 + $15,700 or $170,700. And each of you share 1/3 of that or $56,900. 
2. The appraised value of the property on the date of death was $232,000 and 1/3 of that is $77,300, representing the estate's share.  Half goes to you and half goes to your sister. 
3. So your new cost basis is $56,900 plus $77,300 /2  or $95,500.
4. The net selling price of the home was $208,950 (sales price less the sales expenses).  Half of that is your responsibity or $104,500.
5. That means your profit is $104,500 less the cost basis of $95,500 or a profit of $9,000.
6. Depending on your income that will be taxed at either 0%, 15% or 20%. the appropriate bracket is reflected in this article.  Be sure to pick the right row with your filing status and the chart with this title: 

   2022 Long-Term Capital Gains Tax Rates

https://www.forbes.com/advisor/taxes/capital-gains-tax/

this is a "long term" gain as you owned the property for more than 1 year and your mother's share that you inherited is always considered "long term", even if you owned that share for less than a year.  

If you fall into the 15% tax bracket, it's $1,350 in federal tax.  You'll then have to decide if it is worth paying a lawyer or just paying the $1,350. 

ps.  I would request an appraisal to determine the value of the property as of the date of death.  It is important documentation to have.  

[heather-marco]

NCperson, thank you for the breakdown.

Is there any change if we consider that the mortgage payoff was $152,192? I didn't include it in the seller's costs, but obviously it affects how much profit there actually was.

[VolvoGirl]

No the mortgage doesn't affect it.  It doesn't affect the Profit at all.  Just the net Proceeds.  Profit is Sales price minus Cost + improvements.  The mortgage is already part of the cost,  

[tagteam]

@heather-marco 

The mortgage balance impacts your net proceeds, but it does not factor into your gain/loss calculation for tax purposes.

[heather-marco]

Thanks, Champ. Doesn't make a lot of sense to me, but that's taxes for ya. 😉

[NCperson]

@heather-marco  the tax is based on the  sale of an  ASSET (which is the condo).

The mortgage is a DEBT, so it is not included. 

it's that simple. 🙂