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The Big Move: My sister and I finally sold my mom’s home four years after she died. How will this affect my taxes?

Dear MarketWatch,

I need help to better understand the impact on my taxes from the sale of my parents’ home located in Birmingham, Ala. that my sister and I inherited.  My father passed in March 2015, and my mother passed in 2017. The inherited house remained non-occupied from March 2017 until we recently sold it this year.  The financial numbers are as follows:

My parents purchased the home in 1999 for $59,900.

The documented (received from the Property Tax Office) market value of the home was $97,900 when my mother passed in 2017.

The home sold for $90,000 in July 2021. The home sold for a lower price because of needed repairs — new roof, A/C replacement, etc.

The sale proceeds were split 50/50 between me and my sister.

How do I calculate my “capital gain” based on the stated numbers? Will the capital gain also be treated as income? What tax forms will I utilize to report this transaction?

Thank you in advance,

Inherited Home

The Big Move’ is a MarketWatch column looking at the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage.

Do you have a question about buying or selling a home? Do you want to know where your next move should be? Email Jacob Passy at [email protected].

Dear Inherited,

I am sorry for you and your sister’s loss — the death of a parent is hard enough as is, to say nothing of how difficult it can be to untangle their finances and divide up their estates.

I can imagine the two of you were disappointed that you ultimately sold the home for a loss because of the necessary repairs. There is a silver lining, though, based on what you shared with me about the home: You’re dealing with a capital loss, not a capital gain.

To calculate the capital gain or loss from the sale of home, typically you take the price the home sold for and subtract the value of the home from when it was originally purchased as well as the cost of any repairs or improvements made to the home in the intervening years.

But it’s different when the home is something you inherited from a parent. In this case, you get to step-up the basis: In other words, instead of using the home’s original value when calculating the capital gain (or loss) you use the value on the date when the person died.

Based on what you shared, the home was worth $7,900 more on the day your mother passed away than what you sold it for. In order to report the loss, you’ll need to use Form 8949 to calculate the loss, and then you will report the figures you get from those calculations on your Schedule D.

It’s important to note that the figures you report are for your share of the sale. So divide the relevant figures in half, because you were not the sole beneficiary of the transaction.

“When you inherit a home, you get a step-up in basis that can reduce the amount you owe the IRS in capital gains tax.”

Also keep in mind that when doing these calculations you’ll need to report any other capital gains or losses you incurred during the tax year. So if you finally were able to sell any other assets you inherited from your mother, you’ll need to include those details as well. That will give you your net capital gain or loss for the year, which you then report on your Form 1040. A certified public accountant or tax professional can help with this paperwork, since it can be a bit complicated.

There’s a chance you’ll be able to deduct this loss to reduce your taxable income. To be able to claim this loss, though, there are a few requirements you must meet, according to H&R Block
HRB,
+0.02%

:

You and your sister cannot have used the home at any point for personal purposes

The two of you cannot have intended to convert the property for your own use before selling it.

Plus, the home must have been sold via an “arm’s length” transaction. What that means is you cannot be related to whomever the home was sold to. The purchaser also cannot be related to any of the estate’s beneficiaries or the executor of the estate.

Assuming the net capital loss from the sale overall was $7,900, your share once that number is divided in half would be $3,950. You can deduct up to $3,000 each year from your non-capital income, and the balance of that loss is carried over to the next year.

Again, since you’re likely dealing with carryovers, an accountant can help you figure out the most strategic way of deploying this capital loss and make sure that you’re getting the most out of this situation. While the DIY approach to doing your taxes may be tempting, in cases like yours it can be advantageous to hire a professional to make sure no stone is left unturned. Either way, I hope this advice has given you a guide to how you can tackle this situation so that your parents’ final gift to you and your sister is used to its fullest.

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