Tax Basis for Inherited Property

[shanendoah]

I need help determining what I should use as the tax basis for the condo we inherited when my MIL died in 2012. There was a long term renter in the condo who was a family friend, and we made the commitment not to sell until that person moved. She moved last January, and we sold the condo in April 2015, so now I need to account for capital gains.

	Property Tax Valuation	Fair Market Value
1997 - MIL purchased property	44,500	57,000
2012 - We inherit	24,000	32,000**
2015 - We sell	40,000	63,900

**FMV in 2012 determined through use of Zillow. The estate was not worth enough to have appraisals done, since C was the only heir. And since we had a long term renter, we did not consider selling at the time. And while not a professional appraisal, since the Zillow value is only $8k over tax valuation, and at the times it was sold FMV was 12,500 - 24,000 over tax valuation, I feel that it is somewhat fair.


I know that normally we would use the FMV from when we inherited the property. However, that rule seems to have been put in place to keep heirs from being screwed over, like with my grandparents' property - they bought a house for $20,000 way back when. By the time they both died, it was worth nearly $1mil (location, location, location). Instead of my mom and her siblings being screwed over by over $900k in capital gains, they got to claim the FMV from when they inherited.
But in this case, because of the market downturn, we would be screwed over by having to claim the value of the property when we inherited it.

Can we claim the value MIL bought the condo at as our tax basis, or do we need to claim the value from when we inherited it?

[taz157]

You would use either the FMV when MIL died or the FMV 6 months after she died, whichever is better for you/C.

[shanendoah]

But either way, we are looking at paying on $30k worth of capital gains (okay, not that much because of the costs of selling the condo) instead of $7k worth of gains.

If that's what it is, that's what it is. It just seems odd to use a rule that is obviously in place to keep from screwing people over to screw people over.

[Ombud]

Irrelevant unfortunately. Taz is correct

[TheOtherMe]

As I used to tell people when I audited for the IRS, nobody ever said taxes were fair and they are not.

[taxref]

Don't forget depreciation recapture.  Depreciation on Section 1250 property is treated as a capital gain, subject to a rate of 25%.

[whoisjohngalt]

I know it's late and I am probably not thinking straight - where is everyone seeing $30K gain?  FMV was $32 (basis) when she died, you sold it for $40.  It really doesn't matter what FMV was when you sold it.

[taz157]

Feb 29, 2016 23:25:01 GMT -5 whoisjohngalt said:

I know it's late and I am probably not thinking straight - where is everyone seeing $30K gain?  FMV was $32 (basis) when she died, you sold it for $40.  It really doesn't matter what FMV was when you sold it.

I think the FMV is $63,900, not the $40K via the property tax valuation when they sold the property.

[whoisjohngalt]

Feb 29, 2016 23:35:54 GMT -5 taz157 said:

Feb 29, 2016 23:25:01 GMT -5 whoisjohngalt said:

I know it's late and I am probably not thinking straight - where is everyone seeing $30K gain?  FMV was $32 (basis) when she died, you sold it for $40.  It really doesn't matter what FMV was when you sold it.

I think the FMV is $63,900, not the $40K via the property tax valuation when they sold the property.

Right, but they if they sold it for $40 - the gain will be sales price - basis.  No?

[taz157]

Feb 29, 2016 23:40:17 GMT -5 whoisjohngalt said:

Feb 29, 2016 23:35:54 GMT -5 taz157 said:

I think the FMV is $63,900, not the $40K via the property tax valuation when they sold the property.

Right, but they if they sold it for $40 - the gain will be sales price - basis.  No?

Yes, but I get the feeling that the sales price is closer to FMV than the property tax valuation.

[whoisjohngalt]

Feb 29, 2016 23:46:45 GMT -5 taz157 said:

Feb 29, 2016 23:40:17 GMT -5 whoisjohngalt said:

Right, but they if they sold it for $40 - the gain will be sales price - basis.  No?

Yes, but I get the feeling that the sales price is closer to FMV than the property tax valuation.

Oh, I thought they sold it for $40

[shanendoah]

taxref - I don't think we claimed depreciation on the condo in either 2013 or 2014, so that shouldn't be an issue, but I'll double check my records on that.

whoisjohngalt - We sold the condo for $63,900. We listed for $65,000, but got a cash offer for $63,900 and took that. Because it was a cash offer, no official appraisal was done. But regardless of what FMV actually was, I know I have to pay capital gains based on the amount we actually sold it for.
I was listing the FMV vs the taxable value to show why it is reasonable for us to use the $32k Zillow estimates the FMV was in 2012 vs using the tax valuation when determining what the property was worth when we inherited.

[taxref]

" I don't think we claimed depreciation on the condo in either 2013 or 2014, so that shouldn't be an issue, but I'll double check my records on that."

Recapture applies to depreciation allowed or allowable.  Consequently, it has to be recaptured regardless of whether or not it was claimed.  If it wasn't claimed, you can still amend the 2013 and 2014 returns to do so.

[TheOtherMe]

Mar 1, 2016 21:20:28 GMT -5 taxref said:

" I don't think we claimed depreciation on the condo in either 2013 or 2014, so that shouldn't be an issue, but I'll double check my records on that."

Recapture applies to depreciation allowed or allowable.  Consequently, it has to be recaptured regardless of whether or not it was claimed.  If it wasn't claimed, you can still amend the 2013 and 2014 returns to do so.