Thank you for the additional informtaion.
Since your wife and sister have now both passed away, you will need to figure your new basis in the property
. It gets a little more complicated than normal since there were 3 owners involved, but I will try to give you some examples to explain how this works. Also, you did not indicate if it was your wife or your sister that was first deceased, so you may have to adjust my examples accordingly.
Basically when property is held by joint tenants, and assuming everyone initially contributed equal amounts, then when one of the tenants passes away, the remaining tenants then receive a "stepped up" basis, but only on the percentage which that tenant owned. Your new basis then needs to be reduced by any depreciation which was previously allowed to the deceased tenant. Following is an example of how this works.
Let's say that you and your wife and your sister each contributed $50,000 (total of $150,000) to purchase this property, so you each equally owned 1/3 of this investment. A few years later your sister passes away, and the property at that time is worth $225,000. You and your wife each inherit half of the sister's portion (or 1/6 each). If the value at the time of your sister's death is $225,000, then her portion (1/3) was worth $75,000. You originally contributed $50,000 and you now receive the stepped up basis on the portion inherited
from your sister, which is half of the $75,000, or a total of $37,500. Your new basis is now $87,500. You do not reduce this by any depreciation, because none of the depreciation was claimed by your sister over the years. Your wife's new basis is figured exactly the same, so that now you and your wife each have a new basis of $87,500 each in the property. The new total basis between you and your wife is $175,000 and you each have a 50% share in the property.
If a few years after that your wife passes away and the property is now worth $260,000, then you would again need to figure your new basis in the property. You would now start with your adjusted basis of $87,500 and add to that the stepped up basis on your wife's share. Since the property is now worth $260,000, your wife's share of that (50%) is $130,000. Your new adjusted basis, before deducting depreciation, now becomes $87,500 plus $130,000, or a total of $217,500. Since you and your wife claimed the depreciation on this property, you now have to reduce your new adjusted basis by the depreciation claimed. Let's assume the depreciation you claimed over the years you owned this property came to $27,500. You would deduct the $27,500 from your new adjusted basis of $217,500, and your new basis would now be $190,000.
If at that point you were to immediately sell the property for its market value of $260,000, you would have a reportable gain of $70,000, and you would owe long term capital
gains tax on that amount. If you continued to hold the property and it increased in value, then once you sell it, your gain will be calculated by taking the selling price, less your basis of $190,000, and then adding back any additional depreciation claimed since the death of your spouse.
Please note that the rules
for determining your new basis on property inherited from a spouse in a community property state
are different. I assume from your post that you are from New Jersey which is not a community property state.
I am giving you a link below to Publication 551 which explains how to figure the Basis of Assets
. You should refer in particular to the sections which cover basis on inherited property.
If this was helpful please press the Accept button. Positive feedback is also appreciated.