Reporting Proceeds from Sale of Second Home

[ghellerf]

I need guidance to correctly report the proceeds from the sale of a second home on my federal and state income tax returns. The home was my parents' home. 

Many years ago my parents setup life estate quitclaim deeds for my two siblings and me on their long-time primary home in Wisconsin. In July 2022, my mother entered a nursing home. In February 2023, my father passed away. In December 2023, my siblings and I sold the home for $126,000. My mother, my siblings, and I each received proceeds from the sale--my mother received 37%; each of the three children received 21% (as determined by actuary tables provided by the State of Wisconsin). I received a Form 1099-S Proceeds from Real Estate Transaction. 

It appears I need to report the proceeds as an investment that I sold. Assuming that is correct, I'm working through the questions in TurboTax.
"What type of investment did I sell?" "Second home" seems right. 
"How did you receive this investment?" "I inherited it" seems like the right response. 

QUESTION 1: 

Which proceeds value do I enter in TurboTax? Should I report my 21% portion of the Gross proceeds, which was approximately $26,460 and was reported on the 1099-S form? Or should I enter my Net sale proceeds, which was approximately $24,870 paid out in the disbursement check that I received? 

QUESTION 2: 

I'm prompted to report the "Fair market value when previous owner passed away." In preparing to sell the house after my father's passing, my siblings and I received a $126,000 comparative market analysis value. Should I use that value? Is that value also considered to be the “cost basis from the sale”? Or do I need to somehow prorate this value to 21% to reflect my 21% portion of the interest in the property? After all, four persons effectively owned the house at the time of the sale.

QUESTION 3: 

TurboTax asks if “I paid sales expenses that aren't included in the sale proceeds reported on the form.” While it’s true we did pay expenses in the form of express delivery/courier fees and other fees, those fees were subtracted from our gross proceeds to yield our net sale proceeds. Those fees were itemized on the sellers settlement statement. Therefore, I think the answer to the question is “no,” I didn’t pay any sales expenses that weren’t already subtracted from the proceeds. Does that sound right?

In case it matters, my siblings and I live in states other than Wisconsin.

Thank you.

[tagteam]

The primary issue here is that your parents seemingly reserved a life estate for themselves.

As a result, you inherited nothing with respect to the home because the life estate would not terminate until the last of the life tenants have passed away. Since your mother was still living at the time of the sale, she would be entitled to precisely what she received for the value of the life estate she relinquished while you and your siblings would be entitled to the value of the remainer (future interest).

Therefore, you do not need to conduct any kind of analysis into the fair market value on the date of your father's passing since the only thing that happened related to the home would be your mother became the sole life tenant.

[tagteam]

With respect to the sales price, you should probably enter the figure listed on the 1099-S and then subtract out sales expenses, et al, in order to avoid an inquiry from the IRS (i.e., sales price not matching the 1099-S).

[ghellerf]

If I "inherited nothing with respect to the home," how should I answer the "How did you receive this investment?" question? Options are purchased, inherited, received in divorce settlement, received as gift, or "something else"?

[RobertB4444]

You can still check the box for inherited.  You technically just got your inheritance early.  

@ghellerf 

[ghellerf]

There isn't a sales price value listed on the 1099-S form; only a Gross proceeds value. Is that what you mean? 

If I enter the values
Proceeds = $26,460 (which is the Gross proceeds value indicated on the 1099-S form) and 
Fair market value = $126,000 (which was the home's comparative market analysis value), 
won't that raise a red flag that the proceeds are significantly less than the fair market value?

[RobertB4444]

Your proceeds are 21% of the gross.  So you need to enter 21% of the fair market value.  21% of $126,000 is $26,460.

Also, don't forget the costs of the sale.  In your case that's the $26,460 on the form minus the $24,870 that you received for a total of $1,590.

@ghellerf 

[ghellerf]

I think I understand now. Thank you!