Sale of an inherited property and purchase of a second home (cabin in mountains) within same tax year

[NaomiRH]

Hello,

My husband and I are married and file jointly. We live in Georgia. He and sister inherited a townhouse in Ohio, after their mother passed in 2011. My husband's sister rented the townhouse to a  family member who eventually decided to purchase it. The sale was finalized in January 2022 and she and my husband split the (modest) profit of $100,000. We own the home we live in with our kids and pets here in Georgia. We decided to use some of the money from the sale of the inherited property to fulfill a longheld dream of buying a small cabin in the Blue Ridge Mountains. We close of the property next week. My question is, what tax considerations should I be aware of this calendar year to help reduce next year's tax bill? Thank you in advance for your help! Naomi

[tagteam]

You have a somewhat complex tax scenario since you reside in a different state (Georgia) than the state in which the property was located (Ohio). Thus, there is Ohio source income which will most likely require you to file an Ohio tax return as well as your Georgia tax return.

As a result, you should consult with a tax professional.

See https://taxexperts.naea.org

[AdamNe]

Hello @NaomiRH !

Congrats on fulfilling that lifelong dream! 

There are a couple of tax-related items to discuss: 

First, you will need to report the proceeds of the sale of property. There will be two types of tax on that property. You will pay tax on what is called "depreciation recapture," in which the amount which has been depreciated while the property was being rented is included as ordinary income, taxed at your normal income tax rate. You may also pay capital gains, which are calculated by subtracting the "basis" (fair market value of home on date of death for inherited property, plus any subsequent capital improvements and closing costs) from the total proceeds (amount received in the sale, not including selling costs such as agent commission, title transfer fees, etc.). For your purposes, you will apply 50% to each of these numbers. 

Second, since you are closing on a second home, if you are paying mortgage interest, you will be able to include that interest and any property tax as an itemized deduction on your income tax return. 

I hope that helps answer your question! Please respond here if you need further clarification.

All best,

Adam, EA

TurboTax Live Expert

[tagteam]

---

@AdamNe wrote:

...You will pay tax on what is called "depreciation recapture,"....

---

This is precisely the reason @NaomiRH needs to consult with a tax professional.

Since the property was rented to a family member of the owners, the family member would have needed to pay fair rental value and have used the home as a principal residence (per Section 280A). If otherwise, the property would be considered to be a second home and not subject to depreciation for federal income tax purposes.

I would highly recommend an in-person consultation with a tax professional.

[AdamNe]

Thank you so much, @tagteam ! 

You are absolutely correct. We are here to provide general information to help point those looking for assistance in the right direction. However, to ensure all the details of the tax situation are covered, it is always advisable to contact TurboTax Live experts directly by phone or chat, or alternatively, as you mentioned, to find a local CPA or EA who can help navigate the details of the situation. 

Best of luck to all! 

Adam, EA

TurboTax Live Expert

[NaomiRH]

Thank you!

[NaomiRH]

Thank you, Adam! This is very helpful information. I think I'm going to need an accountant this year.

[NaomiRH]

Thank you for your reply. I have no idea what rent was charged (if any) by my husband's sister to her cousin.  She did not communicate that with us (didn't want to ever sell her half of the townhouse). We waited patiently for a decade for her to get emotionally ready to part with the property (my husband is a sweet man- I would have been less patient). Anyway, sounds like an accountant will be needed this year for sure!