Reporting the Sale of an Inherited Home (1099-S received)

[joedom60]

When Reporting the Sale of an Inherited Home (1099-S received for property transferred to my wife upon her mother's passing in 2020) can her step-up basis (FMV on Date of Death which we obtained via an appraisal) be adjusted in Part II Long Term Transactions on Form 8949 via Code E (box 1f) to include expenses incurred to prepare for sale of the property and/or certain escrow costs which would result in a Long Term Capital Loss? If so, I need help to determine which expenses/escrow costs incurred can be included in this adjustment.

The Date of Death Appraisal in Feb 2020 was $328,000 and the Gross Proceeds of the sale in June 2020 reported on Form 1099-S is $319,900 (property legally transferred via a trust to my wife in Mar 2020), so based on the difference between the step-up basis and Gross Proceeds on Form 8949, she has NO Long Term Capital Gain to report, however, if adjustments are allowed via Code E in box 1(f), we would like to include all that are allowed such that we can benefit as much as possible to offset other Long-Term Capital Gains incurred in 2020 and in carryover for future years.

I have broken down these expenses and escrow costs which I can easily share so please advise if adjustments are permissable and I will share these immediately to see which ones qualify. Thanks in advance for your assistance as there appears to be a LOT of confusion out there concerning the reporting of sale of an Inherited Home!

[ColeenD3]

Yes. The basis of the property will be the Fair Market Value plus Improvements, your closing costs, etc. You can add certain closing costs; not everything is added to the basis.

The following items are some of the settlement fees or closing costs you can include in the basis of your property.

• Abstract fees (abstract of title fees).

• Charges for installing utility services.

• Legal fees (including title search and preparation of the sales contract and deed).

• Recording fees.

• Surveys.

• Transfer taxes. Intangible taxes.

• Owner's title insurance.

• Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions.

[joedom60]

Thanks for your reply Colleen! If you don't mind, can you have a quick look at these costs/expenses so I can make sure I know which ones to include and to confirm that I am filling out Form 8949 correctly?

Thus far for Form 8949 we have entered the following in Part II Long Term Transactions:

Checked “F” for “Long-Term transactions not reported to you on Form 1099-B”

1 (a) we described the property as “Inherited Home” along with the full address

1(b) we entered “Inherited” for the “Date Acquired” in lieu of the legal transfer date of 3/26/20 as per TurboTax Help instructions. Is this correct?

1 (c) we entered the Date Sold as “6/24/20” as per box 1 of Form 1099-S

1 (d) we entered “319,900” as the Proceeds of the Sale as per box 2 of Form 1099-S

1 (e) we entered “328,000” as the step-up basis as per the Date of Death FMV Appraisal

1 (f) Should we proceed to enter Code “E” to adjust her basis for certain expenses incurred to prepare the property for sale and/or costs incurred in escrow?

1 (g) Assuming Code “E” is entered above, which expenses/escrow costs should be included (which IRS approves without question) as permissible for the sale of an inherited property?

Below is a summary of all expenses incurred in preparing the home for sale and escrow costs incurred:

In preparing the home for sale and in making a number or repairs required in escrow, we incurred a total of $2,364 in expenses as follows:

$1114.93 for interior painting after water stain repairs

$501.00 for required electrical repairs per buyer’s inspection report

$158.00 for required HVAC repairs per buyer’s inspection report

$589.86 in misc fix-up expenses incurred

Do all of these expenses qualify to be added to the basis adjustment? If not, can you highlight which ones are OK to include or conversely which ones are NOT permissible?

In addition to the above expenses, can we also include the cost for the DOD FMV appraisal ($425 in this case)?

As far as Closing Costs are concerned , the following escrow costs were assigned to us as the Seller:

Loan Costs:

1. “Origination Charges”:

  Admin Fee…………………………………$949

1. “Services Borrower Did Shop For”:

Title- Copies, Postage, FedEx ect….$75

Title- E-Closing Fee………………………$25

Title- Settlement Agent Fee…………$500

Title- Title Search Fee…………………..$85

Title- Wire Fees…………………………….$20

       Loan Costs Subtotal…………………………….$1,654

Other Costs:

1. E. Taxes and Other Gov’t Fees:

Recording Fee………………………………..…$43.50

State tax/ stamps to State of FL……$2,239.30

1. H. Other

                Lien Search…………………………………..$135

                RE Commission to Listing Agent…..$6,648

                RE Commission to Buying Agent…..$7,747.50

                Title- Owner’s Title Insurance………$429.50

         Other Costs Subtotals………………………$17,242.80

Total Closing Costs from Above…………….$18,896.80

We also contributed a 3% Credit in escrow to the Buyer per the agreed terms……..$8,648

And we were charged a “Title- Premium Adjustment” ………………………………………………..$1,245

Plus County Taxes from Jan 2020 to closing date……………………………………………………$731.98

Adding these 3 additional contributions to the “Total Closing Costs“ Above Comes equals a

“Total Due From Seller at Closing”……………………………………………………………………..$29,521.78

Can you identify which of the above costs can be included in 1(g) of Form 8949? This would be tremendously helpful! Thanks!

[DianeW777]

Here are the answers to your questions. 1(a) - 1(e) are correct.

1 (a) we described the property as “Inherited Home” along with the full address 

1(b) we entered “Inherited” for the “Date Acquired” in lieu of the legal transfer date of 3/26/20 as per TurboTax Help instructions. Is this correct?  

1 (c) we entered the Date Sold as “6/24/20” as per box 1 of Form 1099-S 

1 (d) we entered “319,900” as the Proceeds of the Sale as per box 2 of Form 1099-S

1 (e) we entered “328,000” as the step-up basis as per the Date of Death FMV Appraisal 

1 (f) Should we proceed to enter Code “E” to adjust her basis for certain expenses incurred to prepare the property for sale and/or costs incurred in escrow? Yes or add them to the cost basis in (e) above.

1 (g) Assuming Code “E” is entered above, which expenses/escrow costs should be included (which IRS approves without question) as permissible for the sale of an inherited property?

• Commissions, transfer fees, recording fees, title insurance, etc (do not add prorated property taxes or any mortgage interest on the settlement statement, these are itemized deductions if applicable).

[joedom60]

Thanks for your reply Diane!

Just to be sure I am interpreting your reply correctly, the ONLY cost included in our escrow disclosure that I shared previously which were charged to us as the seller which CANNOT be included in the basis adjustment is this one:

County Taxes from Jan 2020 to closing date……………………………………………………$731.98

Do I have that right?

And OK to include in the basis adjusment all of the expenses incurred to prepare the property for sale as disclosed?

Can I also include the $425 (paid outside of escrow) for the FMV on Date of Death as a valid expense to include in the basis adjustment?

TurboTax tells me that this will result in a Long-Term Capital loss that is limited to $3000 for 2020 but the balance will be carried forward to future tax years. This is welcome news, but just concerned that the adjustments are indeed applicable to an inherited property that was not occupied or rented after the death of my mother-in-law and was sold within 3 months after the legal transfer was completed. I haven't found any language in any IRS document that confirms any of this so I just want to make sure I am handling this correctly from an IRS perspective!

[JeffreyR77]

If the sale of your mother-in-law's residence results in a loss, the loss is not deductible by her heirs just as the loss would not have been deductible by your mother-in-law had she sold it for a loss while she was living. 

This is based on long standing advice provided by the Office of Chief Counsel of the IRS.

Significant Service Center Advice from the Office of Chief Counsel, Internal Revenue Service

[joedom60]

Thanks very much for clearing this up and providing the IRS link. Not what I was hoping for, but thankful that you were able to provide a clear answer to an issue that has been debated within the community for quite some time with no real clarity until now. Much appreciated!

[BuggyMasters]

Wow that’s some seriously good information. So while the loss scenario isn’t beneficial with a non profit generating property, someone could benefit from the closing costs etc in the event they had a gain, it could be genuinely reduced.

[Cynthiad66]

Yes.  The closing costs that are added to the basis of the property definitely reduces the gain on the sale of the property by increasing the cost of the property.