The selling of a parent’s house
I know that this isn’t an IRA topic but I was wondering if anyone knew about the tax consequences of the sale of a house they inherited.
I know that this isn’t an IRA topic but I was wondering if anyone knew about the tax consequences of the sale of a house they inherited.
Permalink Submitted by Alan Spross on Wed, 2012-09-12 01:29
There would be a full basis adjustment for the house to the date of death value. An appraisal might be needed for certain properties to establish that value.
If the heirs do NOT use the house for personal purposes after the parent’s death, the inherited house is considered investment property. While there are some dissents to this conclusion, the commissions and other expenses of sale would produce a LT cap loss for the beneficiaries to the extent the amount realized was less than the DOD value. However, if the beneficiaries move into the house the property becomes personal use property and no capital loss can be claimed upon sale.
If the sale takes place later and the house sells for more than the DOD value after considering costs of sale, any gain would be LT.
Permalink Submitted by fairira on Sat, 2012-09-22 18:34
Alan, in your 9/12/12 post, you said:
“There would be a full basis adjustment for the house to the date of death value. An appraisal might be needed for certain properties to establish that value.
“If the heirs do NOT use the house for personal purposes after the parent’s death, the inherited house is considered investment property. While there are some dissents to this conclusion, the commissions and other expenses of sale would produce a LT cap loss for the beneficiaries to the extent the amount realized was less than the DOD value. However, if the beneficiaries move into the house the property becomes personal use property and no capital loss can be claimed upon sale.
I hope you will comment on the following.
Q. 1: Would using the average of 3 realtors’ estimates of the DOD house value suffice to establish it or when and why would one need a real estate appraiser’s report?
Q. 2: If one of the heirs is living in the house at the time of the parent’s death but then moves out after a month or two, how much longer should the house then be held unoccupied in order to claim it as investment property with a possible LT capital loss (to the extent the sales commissions and other costs result in net proceeds less than the DOD value)?
Q. 3: If the son moves out after a month or two and then the house is put up for rental at a high monthly charge and there are then no renters, how long would it take as a rental property to establish the house as an investment property for that possible capital loss?
Thank you very much.
Permalink Submitted by Alan Spross on Sun, 2012-09-23 00:38
1) It depends on the property and also the size of the total gross estate. If state or federal estate or inheritance taxes are involved, it would normally require an appraisal. As for the house itself with no estate tax return due, if it’s a tract house with lots of comps available, or not large and unusual, documented comps from other sales or a couple real estate agent’s estimates should suffice. The IRS has not published requirements how to document the value, so getting an appraisal is the conservative solution to avoid any issues down the road.
2, 3) It is also somewhat subjective exactly what situations establish personal use. Most likely an heir living in the house at the time of death constitutes personal use, if even for a short time. Heir might be able to establish they were only there to care for the decedent. I have also seen arguments that even without personal use, the IRS might challenge investment property characterization of the property (see my comment on dissents in prior post). If heir moves out, and there is a period of vacancy or rental, there are some rules addressing converting personal use property to investments use to address determining the basis for future sale. This gets down to how aggressive you want to be.
I would get some other opinions on this, as I do not keep current on these issues and am speaking from past impressions.
Permalink Submitted by Bruce Steiner on Sun, 2012-09-23 12:37
Whether to have the property appraised, and if so by whom, is a judgment call on the part of the attorney handling the estate. That what you’re paying him/her for. Regardless of what value you report, the IRS can take the position that the value was a different amount, and the case will then proceed like any other tax case.
Permalink Submitted by fairira on Sun, 2012-09-23 21:10
Alan and bsteiner, thank you for your helpful posts.