Twenty years ago my mom transferred her home to me and my brother, retaining a life estate. She passed away on Feb. 15, 2021. We sold the house in one weekend, for $1.08 million, and closed on June 8, 2021. What tax forms must we use? Can we use the sale price as the fair market value? An appraisal valued the house at $940,000. It was listed at $949,000, and we had multiple offers above the asking price.
You can use the sale price as the fair market value. There’s no better measure.
The profit or loss on the sale of an inherited house is the difference between its fair market value at the owner's time of death plus any capital improvements, and the sale price minus any sales-related fees. For tax purposes, your mother still owned the house because she retained a life estate. Indeed, she'd have owned the house at her death for tax purposes even without the paperwork because she continued living there, says Alan E. Weiner, a Plainview tax accountant.
And in your case, the date-of-death value and sale price are the same; the four month interval is meaningless. So you have no capital gain — and the sale expenses may give you a capital loss. Inherited assets automatically are treated as long-term holdings, says Weiner. You and your brother can deduct your respective shares of any capital loss. For example, if the capital loss is $20,000, the law allows each of you to deduct up to $3,000 a year of your share from ordinary income, or use up to your entire $10,000 share to offset a year of recognized capital gains. Report the sale on your tax returns on Schedule D and Form 8449. For "date acquired," write Inherited.
The bottom line
The best measure of fair market value is an actual sale.
TO ASK THE EXPERT Send questions to firstname.lastname@example.org. Include your name, address and phone numbers. Questions can be answered only in this column. Advice is offered as general guidance. Check with your own consultants for your specific needs.