Ask the Expert: More about selling in inherited house
Yes. Your cost basis when you sell a house always depends partly on how and when you acquired it.
Your mother made you co-owners of the house when she put you on the deed. But she retained a lifetime right to continue living there — in tax jargon, that’s called a life estate. Because of the life estate, the full value of the house remained in her taxable estate at her death, says Alan E. Weiner, a Plainview tax accountant — and when a house is included in a decedent's estate, it passes to her heirs at its fair market value at the time of her death. That's true even if the estate didn't actually incur a tax, he adds. (Tax professionals: See Section 2036 (a) and Section 1014 of the Internal Revenue Code.)
So your cost basis is the market value of the house when your mother died, plus any subsequent capital improvements and sales-related expenses. If those numbers all add up to $970,000, for example, and you sell the house for $1.5 million, your taxable profit is $530,000 ($1.5 million minus $970,000.)
The bottom line
A house in which the decedent retained a life estate is inherited at its market value.
