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Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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My siblings and I inherited the family home after my mother

Resolved Question:

My siblings and I inherited the family home after my mother passed away (4 years ago in New Jersey). Loans had to be taken out to repair the home before sale. It is now under contract. After paying off all the debts incurred, we will be left with approx $90,000 to $100,000 each from the sale.

Does this need to be claimed on my federal income tax?
Submitted: 7 years ago.
Category: Tax
Expert:  Merlo replied 7 years ago.

Hello Customer,


You will be liable for tax on any gain you had from the sale of this property.


When you receive property through an inheritance, you automatically receive a stepped up basis in that property, meaning your basis is the fair market value of that property on the day you inherit it. You may then also add to that basis the cost of any improvements you made prior to the sale. That is then your adjusted basis.


To figure your gain you would take the selling price less your adjusted basis, less the cost of any selling expenses such as real estate commissions. If that results in a gain, then the gain is taxable as a long term capital gain at a maximum rate of 15%. If you did not have a gain from the sale, then no taxes will be due.



Thank you Customer



Customer: replied 7 years ago.
So, if the property was appraised at say $450,000 at the time of the inheritance and it sold for $470,000, after paying combined debts and expenses of approximately $100,000 and our share would be around $100,000 each between my brother and I, is that a gain or a loss?
Expert:  Merlo replied 7 years ago.

Hello Customer,


You said the property was appraised at $450,000 at the time of the inheritance.


Was that before or after you made repairs to the property?


If it was before you made repairs, how much did you spend on repairs to fix up the property?


When you say you paid expenses and debts, were these expenses related to the property or just expenses and other debts that your mother left behind to be paid?





Customer: replied 7 years ago.
The appraisal was around $450,000 or less; I would have to look back to see the exact amount. But that was before we made repairs and some of these were major (reroofing two buildings, plumbing issues, etc.) We had to take a loan out to do the renovations plus pay off outstanding debts (property taxes, home insurance, funeral costs, etc. and the back utilities while the home was being worked on, lawyers fees, etc.)

I don't have all the paperwork as yet. The property is in New Jersey and I live in New Mexico. My brother in New Jersey has been handling everything and sends me copies as things get settled.
Expert:  Merlo replied 7 years ago.

Hello again Customer,


The debts that you had to pay off such as taxes, insurance and funeral costs have no affect on figuring any gain you had from the sale of this home.


If the home was appraised at $450,000 at the time of your mother's passing, then $450,000 would be your starting basis. If you then made repairs such as new roofs, plumbing repairs, etc., you would add the cost of those repairs to that basis. So as an example, if the repairs that you made cost you a total of $25,000, then your basis actually becomes $475,000. If you then sell the house for only $470,000, you actually had a loss of $5,000 and so you will owe no tax.


Using another example -- if the repairs only cost you $10,000, your basis now becomes $460,000. If you sell the home for $470,000, you have a reportable gain of $10,000 which is split equally between the siblings. If there are 4 of you, then each of you would report a gain of $2,500 and your maximum tax at 15% would be $375.


From the extent of the repairs that you say you have made, I would say it is very likely you spent at least $20,000 or more on those repairs. So if that is the case, that will bring your basis up to more than the selling price, and you will owe no taxes on the sale of this property.



Thank you Customer



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