Stephanie B. : Thank you for your question.
Stephanie B. : How did you and your sister acquire your parents' home? Did you inherit it upon death or did they give it to you prior to death. Maybe you and your sister purchased it from them?
Stephanie B. : How you acquired the property determines what basis and holding period you are to use when figuring the gains.
Stephanie B. : The two years issue you are referring to is if you have owned and lived in a home for two of the last five years, you can exclude up to $250,000 of gain per taxpayer.
Customer: We got it when my Mom passes away in 2010. It's taken 3 years to get it sold. Also it was paid for when we got it if that makes a difference.
Customer: My sister has lived in it the last 3 years.
Stephanie B. : Ok. If a taxpayer passed away in 2010, there was the option to take the cost of the property as basis or the FMV at the date of the death. Was an estate tax return filed for your mother?
Stephanie B. : Then the FMV at the date of death is what you can use for your basis.
Stephanie B. : If you and your sister had to make improvements to the property after the date of death, this can also be added to the basis.
Customer: Don't know what FMV means??? It was worth $208,000 if that's what u mean.
Stephanie B. : Basis is the cost you will be reporting on the sale of the property.
Stephanie B. : Yes, FMV is the Fair Market Value. Sorry.
Stephanie B. : It was worth $208,000 at the date of death, not at the date of the sale, correct?
Stephanie B. : Did your sister pay rent when she lived there?
Customer: So we'll have to report it's worth as $208,000 even though we only got $185,500?
Customer: Yes $208,000 at death and no she refused to pay rent.
Stephanie B. : You will report the FMV at date of death plus improvements and selling costs after the date of death as the cost. If that was $208,000 plus selling costs, then that will be the cost you will report. Your sale price is your contract sales price which will probably be different that the cash you actually received.
Customer: Ok, so what kind if taxes are we going to have to pay then?
Stephanie B. : There is a net loss, so you will not owe income taxes on the sale of the property. The amount you sold it for was less than the FMV at the date of death, which created a loss. You only pay income taxes when there is a net gain on the sale. Customer: So we will still report it on our taxes but won't have to pay tax on it then? Sorry, just want to be clear. Planning on buying a home and don't want to be short on funds end of year for taxes.
Stephanie B. : Yes, you will report it but will not have to pay taxes on it. There will be a loss. However, this loss may be of no benefit to you or your sister as personal losses are not deductible. This home was not used for business or investment purposes so it would be considered personal use. The good news is you will not owe income taxes on the sale.
Customer: That's what I wanted to know. Thanks so much!
Stephanie B. : You are very welcome! Good luck on the purchase of your home and please keep me in mind for your future questions with JustAnswer.