How do I figure taxes on sale of inherited home

[Camas Lilly]

I am about to receive somewhere around $200,000 of my share of the sale of my mother's home. How do I go about estimating taxes on this? We normally hover right about the $85,000 mark on taxable income including a 4% draw on retirement investments. Am I correct in estimating we are going to be paying right about 24% then? Our Capital Gains usually aren't that much so not sure there is a whole lot to worry about there.

Thanks

 

[Midpack]

You may not owe anything, depends on the FMV at the time you inherited the house (or share of). What may/not be taxable is any gain from your step up basis (not the former owners basis). Just search online for ‘sale or inherited house’ and you’ll get the IRS docs and several articles. One example:

https://www.realized1031.com/blog/how-to-report-the-sale-of-inherited-property-on-a-tax-return

My sister and I inherited our Dads home in 2019 via trust, sold it immediately and didn’t owe any taxes. But consult a realtor, attorney or tax pro.

 

[ncbill]

Doubt you'll owe anything.

E.g. mom dies and the Realtor lists it for $1,000,000.

Typically (but maybe not this year!) it sells for less than listing, then there are deductions, primarily Realtor's fee, plus any other costs paid by the seller (e.g. pro-rated property taxes)...say $900,000 net to the estate.

So if you're beneficiary of 1/3 of the estate you end up with $300,000, tax-free.

 

[SecondCor521]

Your mother's estate should have received a step-up in basis to the value of the home as of her date of death.

You would then take the sales price minus that basis value to arrive at the capital gain amount.

Typically homes are sold pretty much immediately after death. If so, I think most people treat the sales price as the basis value and arrive at a capital gain of zero.

I *think* the sale is considered LTCG because it's an inherited asset. I'm not sure but I think the capital gains (if any) would be reported on your Mom's estate tax return (if one needs to be filed). Your Mom's estate would be liable for any amount due on her estate tax return. The executor is probably responsible to ensure that that amount is paid.

Short answer is you probably don't owe any taxes on the $200K. The only thing that might apply is if you live in a state that has an inheritance tax with a low exemption amount *and* your inheritance includes more than just the house proceeds - and the combination of those two things is pretty unlikely.

If you're still unsure, it'd probably be wise to consult with your tax professional.

 

[Bamaman]

You might want to get an appraisal on the home to establish what your "basis" on the home is going to be.

If you're selling it, it's also good info to establish a sales price on.

 

[Camas Lilly]

Mom passed away in 2010. Sister created a LLC that split the home between us three siblings. We are dissolving the LLC and sister will get custody of the house after buying the rest of us out.

House was just appraised and my cut looks to be close to $200,000. Since we have had it, the house has had some updates and has appreciated quite a bit.

 

[SecondCor521]

How was the ownership of the home transferred from your Mom to the LLC? It seems to me that might be one sale, and the LLC dissolution might be a second sale. Cap gains would be due at both sales I would think.

 

[Montecfo]

Mom passed away in 2010. Sister created a LLC that split the home between us three siblings. We are dissolving the LLC and sister will get custody of the house after buying the rest of us out.

House was just appraised and my cut looks to be close to $200,000. Since we have had it, the house has had some updates and has appreciated quite a bit.

You need an appraisal of the value near the time of death. Any updates since that time which are capital improvements would be added to the value to represent the new basis. Your share of gain over the new basis is taxable as capital gain.

 

[Midpack]

Mom passed away in 2010. Sister created a LLC that split the home between us three siblings. We are dissolving the LLC and sister will get custody of the house after buying the rest of us out.

House was just appraised and my cut looks to be close to $200,000. Since we have had it, the house has had some updates and has appreciated quite a bit.

Hopefully you know the stepped up basis from 2010 to determine your share of profits. You can also subtract the cost of remodeling/updates from your capital gains. I would consult a tax pro if it was me.

https://www.realtor.com/advice/sell/profits-sale-inherit-a-house/

 

[Camas Lilly]

How was the ownership of the home transferred from your Mom to the LLC? It seems to me that might be one sale, and the LLC dissolution might be a second sale. Cap gains would be due at both sales I would think.

All I know/remember, is Sister was executor of the estate, which was then settled and the home was moved into an LLC for the 3 of us siblings. There were no other beneficiaries.

 

[Camas Lilly]

You need an appraisal of the value near the time of death. Any updates since that time which are capital improvements would be added to the value to represent the new basis. Your share of gain over the new basis is taxable as capital gain.

Yea, that is what I was thinking.

 

[Camas Lilly]

Hopefully you know the stepped up basis from 2010 to determine your share of profits. You can also subtract the cost of remodeling/updates from your capital gains. I would consult a tax pro if it was me.

https://www.realtor.com/advice/sell/profits-sale-inherit-a-house/

Sister is a CPA but hasn't offered any guidance other than I believe she did explain the stepped up basis briefly. I did ask for help in an e-mail I sent today so hopefully she has some answers.

 

[Philliefan33]

All I know/remember, is Sister was executor of the estate, which was then settled and the home was moved into an LLC for the 3 of us siblings. There were no other beneficiaries.

Since the house is held in an LLC, you should get a K-1 at tax time. It will tell you how much of your disbursement is profit (LTCG).

Inheritances are not subject to federal income tax. You inherited your share of the basis at the time of your mother's death. You will only pay FIT on your share of any profit (sale price - value of house on the day mom died - cost of improvements - selling costs).

 

[cathy63]

Mom passed away in 2010. Sister created a LLC that split the home between us three siblings. We are dissolving the LLC and sister will get custody of the house after buying the rest of us out.

House was just appraised and my cut looks to be close to $200,000. Since we have had it, the house has had some updates and has appreciated quite a bit.

There were some special cases in the law for people who died in 2010. If your sister chose to file Form 8939 when your Mom died, then your basis could be different than the fair market value on the date of your Mom's death. In any case, the LLC must issue the proper tax documents to the owners/partners, same as it should have done for the past 10 years, so you'll use that info to file your return.

For planning purposes, you can estimate the value of the home in 2010 and subtract that from the value today and divide by 3. That's the amount will be taxed as long term cap gains. E.g. if it was worth $450K in 2010 when you inherited and today it's worth $600K, then only $150K is cap gains and only $50K of that gain is yours, the other $100K is split evenly between your siblings.

Normally you would also subtract the selling expenses from the gain, but since your sister is buying it from the LLC, those costs are probably very low.

 

[Camas Lilly]

Thanks guys. I have lots of reading to do today!

 

[pb4uski]

Mom passed away in 2010. Sister created a LLC that split the home between us three siblings. We are dissolving the LLC and sister will get custody of the house after buying the rest of us out.

House was just appraised and my cut looks to be close to $200,000. Since we have had it, the house has had some updates and has appreciated quite a bit.

It sounds like that perhaps you own 1/3 of the shares of the LLC and that is what you will be receiving $200k for... if so your gain would be your basis in those shares. I think the result will be the same... your basis in the shares will be the 1/3 of the value of the house when your Mom died.

Did all of you contribute equally to the improvements or did the CPA sister in control of the property pay for them? Or was the house rented and the improvements paid from the rental income? That would impact whether the cost of the improvements woudl be included in your basis.

 

[Winemaker]

Was the house used as a rental after it was placed in LLC? Placing a house in a LLC is usually done to prevent limited liability to owners in case of a lawsuit. That changes a bunch of numbers and angles.

 

[ivinsfan]

Mom passed away in 2010. Sister created a LLC that split the home between us three siblings. We are dissolving the LLC and sister will get custody of the house after buying the rest of us out.

House was just appraised and my cut looks to be close to $200,000. Since we have had it, the house has had some updates and has appreciated quite a bit.

OP you should have started with this post....because you held on to the house for over 10 years after you got ownership

 

[ivinsfan]

Thanks guys. I have lots of reading to do today!

Reading isn't going to help you unless you know all the numbers.Was the house rented or used by a family member?


Is the sister who is a CPA buying it? Hopefully she keeps good records.

 

[Camas Lilly]

It sounds like that perhaps you own 1/3 of the shares of the LLC and that is what you will be receiving $200k for... if so your gain would be your basis in those shares. I think the result will be the same... your basis in the shares will be the 1/3 of the value of the house when your Mom died.

Did all of you contribute equally to the improvements or did the CPA sister in control of the property pay for them? Or was the house rented and the improvements paid from the rental income? That would impact whether the cost of the improvements woudl be included in your basis.

Well, yes and no. Some of the improvements were paid for with mother's life insurance and some were paid for by CPA sister, which unbeknownst to us, the other two siblings, our share has dwindled to about 24% each, while sister gets roughly 50%. Other things that contributed to the decline is nephew residing in the home, rent free and other expenses/services being charged to the LLC without our knowing or being kept updated whatsoever.

Reading the LLC agreement, sister should have been presenting us with the option of contributing to these improvements vs. losing share % of the home and also keeping us informed of the status.

In my opinion, it is best to just get out now. Brother is donating his shares to split between CPA sister and myself as he wants out as well.

 

[Midpack]

This has gotten considerably more complicated as details unfold, with some significant unknowns (to us at least), unlike the OP. I’ll be surprised if the three of you can do this without legal help. At least it’s unlikely your taxable amount will be anywhere near $200K but exactly how much could be difficult to prove to the IRS if necessary. The good news is they’re short handed and might not notice your return - but I’m not recommending a lack of diligence by any means.

Best of luck, a cautionary example of the importance of records, documentation and maybe contracts for all.

 

[cathy63]

This has gotten considerably more complicated as details unfold, with some significant unknowns (to us at least), unlike the OP. I’ll be surprised if the three of you can do this without legal help. At least it’s unlikely your taxable amount will be anywhere near $200K but exactly how much could be difficult to prove to the IRS if necessary. The good news is they’re short handed and might not notice your return - but I’m not recommending a lack of diligence by any means.

Best of luck, a cautionary example of the importance of records, documentation and maybe contracts for all.

It's probably not that bad. The IRS will believe whatever is on the final K-1 that the LLC will issue when it's dissolved. OP doesn't really need to know how to calculate the taxes on the sale of an inherited house, she needs to know how to report a K-1 for a real estate LLC on Schedule E. Presumably she's been doing that for the past 10 years, so it's no different just because this is a final K-1. We're all just trying to guess what the numbers on the K-1 will be based on the fact that a real estate sale is involved.

If the IRS doesn't like the final K-1, they'll go after the issuer, which is the LLC run by the CPA sister. It's her license on the line, so I bet the K-1s are all in order, even if some of her actions (like investing more of her own funds in order to end up with a larger slice of the LLC's assets) seem a little shady to her siblings.

 

[Camas Lilly]

This has gotten considerably more complicated as details unfold, with some significant unknowns (to us at least), unlike the OP. I’ll be surprised if the three of you can do this without legal help. At least it’s unlikely your taxable amount will be anywhere near $200K but exactly how much could be difficult to prove to the IRS if necessary. The good news is they’re short handed and might not notice your return - but I’m not recommending a lack of diligence by any means.

Best of luck, a cautionary example of the importance of records, documentation and maybe contracts for all.

Thanks. I ran some numbers today and it doesn't look too bad at this point. I'll have to dig up the exact basis, but I have a general idea.

 

[pb4uski]

It's probably not that bad. The IRS will believe whatever is on the final K-1 that the LLC will issue when it's dissolved. OP doesn't really need to know how to calculate the taxes on the sale of an inherited house, she needs to know how to report a K-1 for a real estate LLC on Schedule E. Presumably she's been doing that for the past 10 years, so it's no different just because this is a final K-1. We're all just trying to guess what the numbers on the K-1 will be based on the fact that a real estate sale is involved.

If the IRS doesn't like the final K-1, they'll go after the issuer, which is the LLC run by the CPA sister. It's her license on the line, so I bet the K-1s are all in order, even if some of her actions (like investing more of her own funds in order to end up with a larger slice of the LLC's assets) seem a little shady to her siblings.

I tend to agree but if I were the OP I would request all the details for "my accountant" to review. I have a feeling that the CPA sister is playing fast and loose with the truth and that the CPA sister might seek to understate the others basis and overstate the OP's basis to the CPA sister's benefit would seem to me to be a distinct posibility.

 

[HarveyS]

I tend to agree but if I were the OP I would request all the details for "my accountant" to review. I have a feeling that the CPA sister is playing fast and loose with the truth and that the CPA sister might seek to understate the others basis and overstate the OP's basis to the CPA sister's benefit would seem to me to be a distinct posibility.

Well, my CPA sibling played fast and loose with the numbers. What should have been a simple 4 way split was anything but. The CPA sibling ended up with a 40% share to my and my other 2 siblings shares of 20% each. So, the CPA skimmed 20% from each of us to pad their share. Just because a CPA should know how to do this properly, does not mean they actually know, or care to. Multiple requests for "all the details for my accountant to review" from me and my 2 siblings were ignored and we were left with a final sched. K and no back-up whatsoever. Nothing at all. The sched K came in the snail mail. Just it, in the evelope. And the sched. K wasn't delivered until May.

If there wasn't anything to hide, I have to beleive the data would have been shared.