resetting basis of taxes on a rental house I sold in 2023?

[Ronnie 26]

I sold a rental property this year, 2023. The house was previously owned by me and my wife. She passed away in July, 2021. Using an affadavit of heirship became the sole owner of the property. I have been told by a CPA that it is possible to adjust the basis of property value to take into account her passing. How can I go about doing this? And what documentation do I need to substantiate the new tax basis. For example, the house was bought in 1972 for approx $16000. It sold this year for $247000. How do I go about adjusting the basis to its value at the time of my wife's passing and my sole ownership? 

[Andrew_W · Accepted solution]

Hi Ronnie,

Generally, when inheriting property, there is a step-up in cost basis to the fair market value of the property on the date of the decedent's death. In this scenario, since you have inherited half of the property, that half receives the step-up in cost basis.

For example, if the original property basis (what was paid for the property, plus any improvements and less any depreciation) was 200,000, and you owned the property jointly, the basis would generally be allocated 50/50 between you and your spouse (100,000 each). 

On the date of death, the half of the basis allocated to the joint owner who passed away "steps-up" in cost basis to the fair market value of the property as of that date. So, following the example, if the property is worth 400,000 on the date of death, the half of basis the was inherited would "step-up" to 200,000, from the 100,000 noted above, giving a new overall basis of 300,000 (200,000 of the stepped-up inherited portion, and 100,000 from the original owned half). 

For documentation/basis determination, you would need to determine the fair market value of the property as of the date of death (in this case July 2021).

Some guidance on this by Expert @RachelW is located here: 

The "fair market value" is the amount a willing buyer would pay and a willing seller would accept when neither is compelled to buy or sell, in an "arm's length" transaction. 

You can get an idea of the fair market value of your home by using a combination of these options:

• Using the assessed value on your annual property tax bill

• Using the value on your Homeowner's Insurance policy  

• Getting an estimate from a realtor 

• Check out Zillow.com as a comparison tool with the above options.  It is not always the most accurate, but gives you a quick reference point.

[zeishinkoku2020]

How do I enter in TurboTax for the reset of home market value of the home sold that my spouse died a few years ago with titled Community property with right of Survivorship?

[DawnC]

When you enter the sale of the home, you will be asked for the cost basis of the property.   You will enter the adjusted cost basis.   Cost basis is the original purchase cost of the home plus the cost of improvements.   For the property or portion of the property you inherited, the cost basis is the FMV of the property on the date of death.   

To enter the sale in TurboTax>>

If you sold your main home or received a 1099-S:

1. Sign in to TurboTax and select Pick up where you left off.
2. Select Search, enter sale of home, and select the Jump to link in the search results.
3. Answer Yes to Did you sell or have your home foreclosed in 2023?
4. Enter the address of the home you sold on the next screen, and Continue.
5. On the next screen, answer Yes to Did you receive a Form 1099-S that reported this sale? and enter the info from your 1099-S.
6. On the next screens, follow the on-screen instructions to continue entering the info from your 1099-S.

Profits of up to $250,000 ($500,000 on a joint return) on the sale of your home may not be taxable if it was your primary residence for two of the last five years.   We’ll ask you some questions about the sale of your home to see if you qualify.

For the Sale of a second home, click on this link.   @zeishinkoku2020 

IRS Q&A Stepped Up Basis

[zeishinkoku2020]

Thanks for your reply.  My problem is, I am not sure where I enter the "Reset Market Value" upon the date of my spouse died.  I see the column, "increased value" . Is this the place to enter the differenes between Purchase price and Market Value ?  I read it will be reset to step up value upon my spouse death.   I read some TurboTax expert was suggesting to another similar Q & A in 2023, The answer was that the base of reset value will be Purchease price + Market Value upon the date of death = New Oveall Basis.  ( I found this at xxxxwas not able to send this lik by Turbotax   )   

My another question is I recieved " Substitute of 1099-S from the Title company.  Why does it say Substitute and what does it mean?  Is this the official 1099-S?

Thank you,

[PatriciaV]

You may either enter the total adjusted basis that you have calculated (per the previous discussion) or work through the Easy Guide and enter the step-up basis adjustment as an increase in the cost of your home. 

The "substitute" 1099-S provides the same information without actually using Form 1099-S. This is the official report of your sale.

@zeishinkoku2020