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Christopher Phelps
Christopher Phelps, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2710
Experience:  CPA, CFP, PFS, Tax Practitioner 21 Years, Member AICPA/CSCPA Tax/Financial Planning Committee Member
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INHERITENCE

Customer Question

My wifes aunt died last may. My wife along with her brother and sister received the house in the will. It was appraised at 100K and was sold for that amount. My wifes aunts bills totaled 11K. Today we receieved a check from the lawyers for approx 30K (33,333K- 1/3rd of the expenses). My question is what is the tax ramification of this. Is it couted as inheritance and no taxes or counted as a CAP Gain and added to our income. There was a 1099-S issued to us, but it was so vague as to be no use. Our state is North Caroline. Sinceerly Ron Loren Pitts
Submitted: 11 years ago.
Category: Tax
Expert:  Christopher Phelps replied 11 years ago.

The sale transaction of the property is reportable by your wife and the other heirs, since they became owners by inheritance prior to the sale.  Thus, the sale will need to be reported on schedule D of your Form 1040 for the year of sale.


Your wife's cost basis in the property is equal to 1/3 of the value of the home reported in her Aunts's estate tax return (Form 706 is required to be filed in the event the decedents gross estate exceeds $1,500,000 for decedents dying in 2004 or 2005).  If an estate tax return was not filed, then your wife's cost basis is 1/3rd of the fair market value as of the date of death of the Aunt (i.e. approx. 1/3 of the $100k appraised value).  


The reported sales price will be equal to 1/3 of the proceeds fom the sale less selling expenses.  The cost basis will be equal to 1/3 of the date of death fair market value plus any improvements made after death but before the sale.  


Neither N.C. nor the U.S. has an "inheritance" tax, thus as beneficiaries you will only be subject to income tax on any appreciation of the property between the date of the Aunt's death and the date of sale.  If you had inherited tax-deferred accounts such as IRA's, you would have to report as ordinary income on any withdrawals, just as the Aunt would have had too. 


Based on the information you provided, there will likely be a loss reported by you equal to your share of the selling expenses (i.e. your net sales proceeds equal $33,333.33- 1/3 of the expenses less basis equal to the FMV at date of death of $33,333.33). 

               
Customer: replied 11 years ago.
Reply to Christopher Phelps's Post: Thanks for your timely manner, however the answer remains ambigious to me. YOu state that i will have to report the sale as income, and later that i will take a loss. Will the addition of the 31K (1/3rd of the proceeds minus expenses) be added to our total income? I.E. if we expect to make 100K this year will it actually be 131k? thanks. Ill pay more for the answer if it is a bit more complete.
Sincerly
Ron loren Pitts
Expert:  Christopher Phelps replied 11 years ago.

You have two events.  The inheritance which is tax-free and the sale of the property which is not tax-free.


The inheritance itself (i.e. the $33,333-1/3 of expenses) is not taxable to you or your wife.  It will not be reportable as income on your return.  Thus, she receievd an asset (1/3 of a house worth $33,333 which becomes her cost basis) tax-free. 


She then sold the asset in concert with her siblings (or other heirs) for $100,000 (less expenses).  Thus, you have to report the real estate transaction in Part II (long-term)of schedule D (http://www.irs.gov/pub/irs-pdf/f1040sd.pdf) of your 1040 (the tax return for the calendar year that includes the sale).


Report as the sale proceeds in column D the amount you got the 1099-S for.  In the cost basis column E report the value of the asset your wife received (i.e. $33,333) PLUS the 1/3 expenses of the sale.  The difference is the gain or loss reported in column F and carie forward to line 13 of the 1040.  

 

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