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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28088
Experience:  Taxes, Immigration, Labor Relations
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My two brothers and myself inherited our parents two houses

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My two brothers and myself inherited our parents two houses after their passing 4 years ago. My oldest brother is Executor and has taken it upon himself to control everything that he wants to. I have been trying to be bought out since the beginning. He finally made me an offer on one of the houses that was pretty much destroyed by Hurriance Sandy in Ortley Beach, NJ. Just an empty shell now. Th asking price all considered for the house is $200,000. He offered me my 1/3 of $66,666.66. However, he does not intend to sell this house, but I have been trying to get out of this mess. Inheritence tax was paid on both properties 4 years ago. Will I have to pay tax on the money I receive and if so, at what rate? Thank you, Dan

Lev :

Hi and welcome to our site!

Lev :

You actually selling 1/3 of the property - and must report the sale transaction on your tax return - and will calculate the taxable gain or loss.
The gain or loss is equal to $66,666.66 (selling price) MINUS (adjusted basis).
Because the property was inherited - the basis is generally the fair market value of the property when the decedent passed away. The basis should be adjusted by all improvement expenses and casualty losses claimed after your your parents passed away.
So - if there will be any gain - that gain will be taxable as a long term capital gain at reduced rate.
If there would not be any gain - there will not be any income tax liability - but still the sale transaction should be reported.

Customer:

So, if the one house we are referring to is worth less now due to the hurricane damage and there had been no improvements to the house since the inheritance, I may not have to pay tax on my portion? If the house is worth less today than 4 years ago, how do I prove that when I claim on my tax return? Someone told me that the government will tax me for about 20-30% of $66,666.66. How true is this?

Lev :

So, if the one house we are referring to is worth less now due to the hurricane damage and there had been no improvements to the house since the inheritance, I may not have to pay tax on my portion?
That is correct. However if the insurance claim was received or casualty losses were claimed - the basis should be adjusted - reduced by that amount.
If the house is worth less today than 4 years ago, how do I prove that when I claim on my tax return?
There is nothing you need to proof. Your selling price is what you agreed with your brothers. The basis is the fair market value of the property when the decedent passed away - you may use the valuation made for inheritance tax purposes.
Someone told me that the government will tax me for about 20-30% of $66,666.66. How true is this?
You may be taxed on your gain - not on the selling price. The gain is calculated as (selling price) MINUS (adjusted basis).

Customer:

Someone told me that the government will tax me for about 20-30% of $66,666.66. How true is this?
You may be taxed on your gain - not on the selling price. The gain is calculated as (selling price) MINUS (adjusted basis).

Lev :

That is correct - income taxes are calculated on the gain - not on the sale price.

Customer:

One more thing, trying to understand (Adjusted Basis). Can you tell what percentage is applied to the gain. He is not selling the house, only buying me out for my 1/3. Sorry, I am trying to understand this whole gain process. Thanks so much!

Lev :

If he is buying you out - that means you are selling 1/3 of the property - and he pays you for that.
As you already notice - it is very important to determine the basis.
Because the property was inherited - the basis is generally the fair market value of the property when the decedent passed away. To determine that - you may use the valuation made for inheritance tax purposes.
Then - you need to verify if the insurance claim was received or casualty losses were claimed because of the damage - and the basis should be adjusted - reduced by that amount.
For instance - 4 years ago when your parents passed away - the fair market value of the property was $200k.
Later - $50k insurance reimbursement was paid because of damages resulted by Hurricane Sandy. So your adjusted basis became $200k - $50k = $150k.
Then - you did some improvements or clean the area - and spent $10k. So your adjusted basis became $150k + $10k = $160k.
Because you are selling 1/3 of the property - your portion of the basis would be $160k / 3 = $53.3k
That is just an illustration example. You actual numbers might be different.

Customer:

Thank you for your information.

Lev :

You are welcome.

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