Sale of rental property gifted to me

[Golf_girl]

In early 2022 a family member passed away and their home was rented out.  The home remained in probate until mid-2023, at which point it was gifted to me from the new official family member owner.  I owned the property for a few months then sold it in 2023. 

Questions:  what value do I use as the cost basis (date of death in 2022)?  Is it ok to use comps via Zillow or other records to establish FMV from 2022 since appraisal was not done?   How do I calculate cost basis for the property gain/loss purpose?  How do I calculate Sales Proceeds amount I sold it for gain/loss purposes (sales price, closing costs, etc)?

[RobertB4444]

The cost basis is the value at the date of death when your family member inherited the property.  That basis transferred to you when the property was gifted to you.  

Determining the value at the date of death can be done by using the value from the tax rolls at that time or by using comparable property sales from that time.  Whatever method you use just be certain to save documentation proving the valuation.

The gain on the sale is determined by entering the sale price that the house was sold for and then subtracting the cost basis you determined along with the expenses of the sale which include all the closing costs that you mentioned as well as any money you spent out of pocket fixing the place up for the sale.

@Golf_girl 

[Golf_girl]

Thanks.  Even though the property was in probate for all of 2022 and most of 2023, I was receiving the rent payments. Do I include all that on the schedule E for the rent I received in 2023 even though I didn't own the property until it was formally gifted to me?

[MarilynG1]

Since you didn't own the property while it was being rented, the actual owner needs to report Rental Income & Expenses on their return.

You can't receive rent or pay expenses for a property you don't own.   Basically, if the owner gave you the rent payments, it was a 'gift' to you. 

Here's more Community Discussion on that topic. 

[Golf_girl]

Thanks.  There really wasn't an owner though since the property was in probate (not sure if that means it was the deceased's estate) which I have no visibility into those taxes. 

[KrisD15]

Real Estate follows State rules, however USUALLY the rent is claimed on the final return of the Estate. 

If the Executor gave you the remaining rent (after any money was used for repairs and/or mortgage) that would be considered as a gift.

Gifts are not claimed nor reported by the Taxpayer who receives the gift. 

HOWEVER you say  "it was gifted to me by the new official family owner"

If the property passed from the estate to a family member AND THEN WAS GIFTED TO YOU, your basis is the basis of the property is determined as follows:

According to the IRS:

"To figure out the basis of property received as a gift, you must know three amounts:

• The donor's adjusted basis just before the donor made the gift.
• The fair market value (FMV) of the property at the time the donor made the gift.
• The amount of any gift tax paid on the gift (Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return).

If the FMV of the property at the time the donor made the gift is less than the donor's adjusted basis, your adjusted basis depends on whether you have a gain or loss when you dispose of the property.

• Your adjusted basis for figuring a gain is the donor's adjusted basis just before the donor made the gift, increased or decreased by any required adjustments to basis while you held the property.
• Your adjusted basis for figuring a loss is the FMV of the property at the time the donor made the gift, increased or decreased by any required adjustments to basis while you held the property.
• Note: If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and get a gain, you have neither a gain nor loss on the sale or disposition of the property. 

If the FMV of the property at the time the donor made the gift is equal to or greater than the donor's adjusted basis, your adjusted basis is the donor's adjusted basis just before the donor made the gift, increased or decreased by any required adjustments to basis while you held the property.

• If the donor paid a gift tax on the gift and made the gift after 1976, increase your basis by the gift tax paid on the net increase in value. "

"The donor's adjusted basis just before the donor made the gift." THE FAIR MARKET VALUE ON DATE OF DEATH

"The fair market value (FMV) of the property at the time the donor made the gift." THE FAIR MARKET VALUE WHEN YOU BECAME OWNER

"The amount of any gift tax paid on the gift" YOU WOULD GET THIS FROM THE EXECUTOR OF THE ESTATE 

Use an honest effort to determine the value of the property on the date of death. 

Use the tax roll as previously suggested, or speak with a local Real Estate Broker or Appraiser. 

Chances are the inheritance and sale will be a wash since the value of the property would not have changed substantially during the several months you were the owner.