Simple Approach to Selling Inherited House

[sengsational]

DW and her brother inherited her dad's house the end of last year. For some strange reason (probably because they're due to have the sale closing in one month), when I woke up this morning, I decided to start digging into the house sale tax consequences.

I dug a bit on this board and found some nuggets:

TT also confirms that a loss can be claimed:
https://ttlc.intuit.com/questions/2...d-from-the-sale-of-inherited-property-taxable

So that's another thing I stand corrected on today. Something else that stood out to me in this article:

For the date acquired, enter “Inherited.” This makes sure you receive long-term capital gain or loss treatment.

So you not only get step-up basis on inherited property, but you also get LTCG (or loss) treatment. I did not realize that. I assumed with the step-up basis, the "purchase date" would be the date you inherited it. I confirmed with a couple other sources that it is immediately treated as LT.

Inherited property is treated like investment property (i.e. you can claim the loss) unless you live in/on it. If you lived there, then it's personal property and you can't deduct the loss.

Many times a loss can be taken when you factor in the expenses of selling the property!

In NC, the kids own the house on the date of death (Nov 2019), no probate. Although one might have hired an appraiser back then, that wasn't done. A few agents were called in January and a general idea was established for what the house might have sold for "as-is", but no formal list of comps or anything. So the November fair market value (nFMV) as of about 10 months ago is rather mushy. I read that one could use a FMV 6 months later, but in those stages of the pandemic, I'm not sure what the housing market in the area was doing then, and besides, that era has come and gone anyway.

The decision was made (not by me) to do some fixing up. So the owners put in some money, about 5% of that nFMV. So now the basis is 1.05 * nFMV. The contract for sale has the owners netting almost exactly nFMV (1.00), so since they didn't live in the house, it seems that they can claim a long term capital loss equal to (1.00 - 1.05) * nFMV, or five percent of the November fair market value.

I'll offer a simplified case: Let's say that the housing market didn't go up or down in the span between inheritance and sale. And the house wasn't lived in, and nothing was spent to fix it up. When the house sold, they'd have a capital loss of 6%, just because that's what the commissions expense would be. That mental exercise is just to say that when selling an inherited property, it would seem logical and common for those inheriting the property to show a capital loss on the order of selling expenses.

In thing like this, I know some people like to have a pat answer, fully documented, ready to be handed over to the IRS, should they ask. But that's a lot of work that might not be required. I'm more the kind of person who postpones the formal report until they ask for it. If they do ask, I'd say "I think I did all that stuff right, and within the spirit of the rules. What paperwork do you want me to scrape together now that you're asking?" If I do a bad job gathering the report they ask for, maybe I pay a few bucks more. I guess there are "accuracy penalties" that I'd like to avoid paying, if possible, but the fair market value of a house like this one (not a lot of really comparables, and not many transactions), it's too much of a pain to put too fine a point on it.

It seems like the sales price 10 months later is the best indicator of the true market value, so it's almost seems like I should be able to multiply that by 0.06 (sales expenses) and take that as my long term capital loss, which is "a simple approach to selling an inherited house"

 

[pb4uski]

Your realtor should be able to look at comps through Nov 2019 and come up with an estimate of the value in November 2019.... that plus the improvements are your basis.

 

[nwsteve]

And costs of sales like commission/excise tax/stamps/title and non capital prep (e.g. painting/trash haul away)are deducted from proceeds as a I recall before calculating gain/loss

 

[pb4uski]

Yes. I assume that the OP would know that.

 

[cathy63]

Your realtor should be able to look at comps through Nov 2019 and come up with an estimate of he value in November 2019.... that plus the improvements are your basis.

Agree. Looking up comps for a property you've owned less than a year should be easy and I'd ask the realtor for that info. If you don't want to/can't, then Zillow has a filter that lets you search for Sold homes. You just have to page back through time to last November and see if there's much difference between prices then and now.

 

[Bamaman]

If the sale is questioned by the IRS and there was no appraisal, wouldn't the IRS use the parents' "BASIS" for the transaction? In most cases, that's simply what they paid for the home originally.

And the inherited owners could pay a small fortune in taxes.

By all means, have that house formally appraised immediately--with a conditional price based on the date of the death of the owner. If the IRS questioned the sale, you'd at least have a big portion of what they're looking for--documenting the current "BASIS" of the home.

While the IRS may not ever question the sale proceeds, it's not worth the risk of paying a big tax load if they'd hold you to the letter of the law.

I was fortunate that my parents had sold their home and lived in a luxury apartment in their last years. It essentially avoided me from going through any expensive probate proceeds.

 

[pb4uski]

If the sale is questioned by the IRS and there was no appraisal, wouldn't the IRS use the parents' "BASIS" for the transaction? In most cases, that's simply what they paid for the home originally. ...

I don't think that they would do that... they would likely just come up with a more conservative estimate of the Nov 2019 value. IIRC an appraisal is only a few hundred $, so the most bulletproof way is to just have an appraiser do an appraisal of the property as of Nov 2019... the fact that it isn't done until about a year later isn't particularly relevant.

Or you could use a "free" market analysis from a realtor but that will ot be as authoritative in the IRS' eyes... but it might be good enough.

 

[Doribe]

It seems like the sales price 10 months later is the best indicator of the true market value, so it's almost seems like I should be able to multiply that by 0.06 (sales expenses) and take that as my long term capital loss, which is "a simple approach to selling an inherited house"

I think this is reasonable. Determine basis from real estate sales around the time of death or up to six months later. Use whichever number works better for your needs. For simplicity, you determine the basis is $100k. Sales expenses, repairs, taxes, fees add up to 10%. If the FMV and selling price is $100k, your loss would be $10k.

I would get the FMV documents for the basis and sold dates. It could be difficult to pull that together after a few years.

I would do this.

 

[sengsational]

By all means, have that house formally appraised immediately--with a conditional price based on the date of the death of the owner. If the IRS questioned the sale, you'd at least have a big portion of what they're looking for--documenting the current "BASIS" of the home.

While the IRS may not ever question the sale proceeds, it's not worth the risk of paying a big tax load if they'd hold you to the letter of the law.

Given an arms-length transaction is pending, getting an appraisal now seems kind of silly, as, by definition, we have settled on a fair market value. The only issue is whether it's changed in the last few months.

I don't think that they would do that...

Me neither.

I think this is reasonable. Determine basis from real estate sales around the time of death or up to six months later. Use whichever number works better for your needs.

As I mentioned, I doubt the IRS is going to go after a transaction where the guy is not trying to get away with anything, so spending lots of time any money on documenting the fair market value isn't in the cards. But I think I'll explore rolling back the date on Zillow, primarily to lend credence to my position that the market hasn't really changed in the last 10 months. If the market was flat, and this is an arms-length transaction, that should be good enough.

 

[nwsteve]

But I think I'll explore rolling back the date on Zillow, primarily to lend credence to my position that the market hasn't really changed in the last 10 months. If the market was flat, and this is an arms-length transaction, that should be good enough.

+1

 

[Sunset]

Given an arms-length transaction is pending, getting an appraisal now seems kind of silly, as, by definition, we have settled on a fair market value. The only issue is whether it's changed in the last few months.

...

As I mentioned, I doubt the IRS is going to go after a transaction where the guy is not trying to get away with anything, so spending lots of time any money on documenting the fair market value isn't in the cards. But I think I'll explore rolling back the date on Zillow, primarily to lend credence to my position that the market hasn't really changed in the last 10 months. If the market was flat, and this is an arms-length transaction, that should be good enough.

+1
If the IRS does suggest the basis is the original selling price (parent purchase), then you can always get an appraisal for the value at death time.
At that point it will be worth the few hundred dollar expense.

 

[Montecfo]

+1
If the IRS does suggest the basis is the original selling price (parent purchase), then you can always get an appraisal for the value at death time.
At that point it will be worth the few hundred dollar expense.

The is just no reason the IRS would suggest that. It has no relevance.

 

[CaliKid]

Not clear was the property gifted before death? If so kids have parent's basis and good luck figuring that out! If it was gifted before death I would just guess on basis and odds are the IRS won't audit. I should add that I am NOT a tax professional and you should probably consult with one so you get the best advice. If they inherited at death then they have date of death appraisal which is a non-issue if they are selling now. I would just show basis as same as sale price or 2% below sale price if you want to be extra cautious. Then the costs of sale will wipe away any gain so no cap gains tax. If ever audited (not likely) then can get a retroactive appraisal which is not a huge deal for a death that was just last year. Getting a retroactive appraisal, if the property was gifted 10 years ago for example, would be a bit costlier I believe. The only problem will be is if the property was gifted before death. This would be horrible estate planning as it would create a large (potentially) capital gains tax in order to avoid the costs of probate and/or the preparation of a living trust. Always better to just prepare a living trust rather than try to outsmart the tax man! Good luck.

 

[The Cosmic Avenger]

Yes, try Zillow. I was able to see a history of estimates using the "owner dashboard" after claiming my address. (The legend for the lines have blocked out my ZIP code and my town name, it's giving the average for those also.) In case it's hard to see, the red box says "Nov 2019" because the vertical line shows where I hovered the mouse over the graph.

 

[Sunset]

The is just no reason the IRS would suggest that. It has no relevance.

I my limited experience in dealing with tax folks, when they don't have a value they believe, they will assign a value for you. Often that basis is actually $0.00

Then you can disprove that basis or just pay the tax assigned on the entire gain.

 

[Starsky]

When my mom passed, as the executor of the estate, I was required to file a Federal estate tax form K-1 that described the value of the distributed assets. I received a copy for my taxes of what I inherited, and my brother received his copy for his taxes. I used that valuation to establish my new basis for future tax reporting and eventual sale. It had no financial impact on our taxes for the year.

When establishing the value for the K-1, I initially made copies of Zillow prices too. My accountant asked me to get a realtor's estimate from my property manager/broker. Her estimate is what I provided to him for tax purposes. Evidently Zillow prices are not reliable estimates for the IRS and could be challenged.

It's interesting timing, given that we just sold one of our inherited properties in NC to free up some cash - it closes on the 21st. It sold immediately and over asking price! I don't expect us to pay any capital gains taxes on the sale proceeds. Because of our selling costs, we may even be able to claim a small loss on the sale next year, net of the repairs and broker fees.

 

[Montecfo]

I my limited experience in dealing with tax folks, when they don't have a value they believe, they will assign a value for you. Often that basis is actually $0.00

Then you can disprove that basis or just pay the tax assigned on the entire gain.

Sure. But in that case, as I said, the parents' basis also would not be relevant.

And a basis of zero would be easily disproven.

 

[pb4uski]

The is just no reason the IRS would suggest that. It has no relevance.

Agree... it is just plain silly to waste electrons on that possibility.

 

[sengsational]

The Zillow history is good. The $3000 off of other capital gains for a few years isn't worth much to us, and worth nothing to the other owner, so no need to press the limits or invest much time. It seems to me that choices made for big money estates are where it pays to be detailed and have all the documentation prepped in advance. The kids did the estate stuff, sans lawyer, because the house transferred on death, as did the money accounts; the next most valuable thing was the lawn mower