On an inherited house what other fees can be included to adjust cost basis

[scocpm]

Hi, I inherited my mother’s home as the sole beneficiary and also the executor of the will.

The house is paid off and the prices go for around $250,000-290,000. I will be selling the house quickly as soon as the summary probate is completed. I hired and an appraiser to provide the stepped up basis at Time of death.

Question- Is the appraisal fee, title fees such as title insurance for buyer, title search, state document fee/taxes, title office fees, HOA fees, house taxes, insurance for home, and utilities
Can be included in basis? Also what about probate costs for filling out the paperwork and the courts filing fee?
Just want to make sure also the only form I fill out for the sale of the home is IRS form 8949

in the year sold?

[Bsch4477]

As you are aware, the cost basis of the home is its value at the time of the decedent’s death. Since the selling price, if obtained soon after that death, is a true indication of the home’s value, that figure is more accurate than that of an appraiser. Since you receive all of the net proceeds tax free because it is an inheritance, the other costs are not relevant to your tax situation because there is no effect on your income from the sale.   You would only report the home sale if you receive a 1099-S. Since you have no tax liability for the income from the sale the realtor might not initiate that form if they understand the circumstances. 

Note that this reply deals only with your situation and not any possible estate tax liability. 

[ee-ea]

The answer by Bsch4477 does not deal with inheritance taxes in IA, KY, MD, NE, NJ, and PA either.

[Opus 17]

You start with the fair market value on the date your mother died.  This can be established by an appraisal.

You can add permanent improvements you pay for, but not minor repairs that are part of selling the home (cleaning, painting etc.)

Certain closing costs from your sale will be allowable adjustments to the basis.  They are listed on page 8 of publication 523 and include the real estate commission and some (but not all) taxes and fees associated with the sale.  https://www.irs.gov/pub/irs-pdf/p523.pdf

Staging expenses are an allowable adjustment (considered a selling expense as "advertising"), but only as long as they do not make any changes to the home itself.  In other words, renting furniture and moving it in and out, without changing the home, is an allowable selling expense and adjusts the cost basis.  But painting, changing light fixtures and so on, is not staging, and is either a repair (allowable adjustment) or a repair/maintenance item (not allowable adjustment).

HOA fees, property taxes, insurance and utilities are never** adjustments to cost basis.  Property taxes for property you own are deductible on schedule A as an itemized deduction, subject to the overall $10,000 cap on deducting state and local taxes.

Note that if you get a 1099-S for the sale, the IRS is going to try and match that to your tax return.  So while the ordinary way to treat selling expenses is to reduce the selling price, it confuses the computer and may result in a letter.  Assume the FMV is $250,000, the selling price is $270,000, and you pay $9000 in allowable closing expenses.  The IRS will want to see you report a selling price of $270,000 and a cost basis of $259,000, instead of a selling price of $261,000 and a cost basis of $250,000.  It all comes out the same in the end. 

(**If you carry investment property for more than 1 year, you may have the option of capitalizing certain carrying costs into the cost basis.  But this is complicated, and may no longer be allowed after the 2017 tax reform--the IRS hasn't definitively ruled.  But capitalizing costs does not apply in your case if you plan to sell quickly.)

[Opus 17]

@Bsch4477 

That answer assumes a stable real estate market, which may not be the case in some markets.  Values in my area were supposedly rising several thousand dollars per month last year; they may be falling as fast now.  If there is a significant discrepancy between the appraised value and the selling price, it is up to the taxpayer to prove the appraisal was wrong, and this may be difficult to do.  Ignoring the appraised value should only be done when you have a professional to stand behind you if you are audited. 

That said, even if there is a price increase, the real estate commission and other closing costs that are allowable as adjustments may negate any gains. But like 10th grade algebra, you have to show your work to the IRS. 

[scocpm]

Can I ask what about probate costs I am not using a lawyer I’m using a place called by the people who will fill out all paperwork and submit it to the court. Is the filling out of the paperwork and court filing fees a cost basis item?

[scocpm]

So just to be clear if I inherit a home I do have to fill out IRS form 8949 for the sale of the inherited home when it’s sold? 
What happens if home sells for less is that a capital Loss?

[Opus 17]

---

@scocpm wrote:

So just to be clear if I inherit a home I do have to fill out IRS form 8949 for the sale of the inherited home when it’s sold? 
What happens if home sells for less is that a capital Loss?

---

I don't believe your probate costs add to the basis.  Probate is a personal legal expense, and even if this property is the only asset in the estate, I don't believe your costs add to the basis.  However, basis is discussed here https://www.irs.gov/taxtopics/tc703 and in IRS publication 551, you may want to look yourself.  If probate costs were to be allowable as adjustments to basis, you would have to allocate your costs proportionately to the entire estate (house, contents, and any money or investments).  

Yes, you have the sale of a capital asset and you report the sale on schedule D and form 8949.  You can't deduct losses on personal property, but as long as you never lived in the home or used it for personal use, and you sell it fairly quickly, you can call it investment property and the IRS will probably allow it in the unlikely event of an audit.  (Example, this is your mother's lake house.  All the aunts, uncles and cousins take turns at the lake house for one last summer, before you sell.  That's probably enough to make it personal and not investment property.)  You can deduct capital losses against other capital gains.  If you have no other capital gains, you can deduct $3000 of capital losses against ordinary income and carry the rest of the loss forward to the next tax year.

Depending on your gain or loss on this home, and any other investments you might have and how they have performed, you might sell other investments to offset a gain or take advantage of a loss, but that's something to discuss with a financial planner. 

[scocpm]

Thank you so much for all this information.

[Mike9241]

@scocpm . if you are issued a 1099-S you'll need to report the sale on your 1040.  the IRS gets a copy. so if you get the form and don't report it. the IRS sends you a bill/notice because it assumes the cost basis is zero which will result in a taxable gain. then you have to go through the procedures in the bill/notice to refute the IRS findings which would likely require preparing an amended return.  

if you sell quickly there is likely to be a loss once selling expenses are taken into account. when determining FMV at the date of death, costs associated with selling are not taken into account. 

[Bsch4477]

Legal expenses for probate are deductible, but they are deductible to the estate on the estate's income tax return (Form 1041) if required to file them. If you paid the legal fees for probate you should be reimbursed by the estate before any distributions are made to beneficiaries.

[spikedmouse]

My daughter inherited a mobile home on 11/1/22 and sold it for $25,000 on 11/17/22 (total estate under $50,000 so no probate). When she files for capital gains in 2023, what cost basis should she use if there was no assessment or fair market value at time of death?

Your message says "As you are aware, the cost basis of the home is its value at the time of the decedent’s death. Since the selling price, if obtained soon after that death, is a true indication of the home’s value, that figure is more accurate than that of an appraiser." So would $25,000 for cost basis be acceptable (and legal) to the IRS on forms 8949 and schedule D? Or is this unacceptable?

Thank you

[Bsch4477]

If she doesn’t receive form 1099-S, which is likely, she doesn’t have to report the sale at all. You are correct that selling the home so soon would reflect the FMV accurately. 

[spikedmouse]

Thank you so much! I have been looking for an answer forever! Thank you!!!

[Opus 17]

---

@Bsch4477 wrote:

If she doesn’t receive form 1099-S, which is likely, she doesn’t have to report the sale at all. You are correct that selling the home so soon would reflect the FMV accurately. 

---

I disagree on this point.  The idea that you don't have to report the sale of a home applies to the owner-occupant who qualifies for the exclusion.  The daughter here is the heir/beneficiary and the property is basically investment property.  So I think it needs to be reported on schedule D regardless of the 1099-S.

I generally agree that most of the time**, the selling price which is "close" to the date of the previous owner's death will represent the actual FMV, probably better than an appraisal.  An appraisal is a best guess by an expert; but if the property is sold in the open to a stranger, then what they pay is the value they set.

**Selling price might not represent FMV if the home was being sold to a related party (relative, partner, etc.).  And we could imagine some weird scenarios where the value changes (for example, if gold were discovered on the property between the date of death and the date of sale).  But absent such unusual circumstances, you are on solid ground listing the sale price as the FMV.