Mother in law passed July 1, 2009 leaving a house to brother & sister (my wife). They sold the house at auction in Ogden, Kansas Sept 15, 2009 House sold for $46,000 with the following fees taken out ….2,300 real estate commission; 376.50 Fees to Abstracters ( 176.50 Owners Policy + 200 Settlement Fee); 463.04 Advertisement Fees; 648.68 County Property Taxes 1/1/2009-9/15/2009. Net proceedes $42,211.78 or $21,105.89 each for brother & sister. In addition my wife paid off the nursing home fees of $5340 out of her share of the house net sale. The only value of the house is the City of Ogdens 2009 tax valutation of $69,600. From what I have read on you web site we owe Capital Gains/ Loss & must file a Schudle D – 1040. Now help me out here Schedule D – 1040 Short Term Cap Part-1 For My Wife & I ….. Line 1a would be House & Property + address; Line 1b 7-1-2009; Line 1c 9-15-2009; Line 1d – the 1099S has gross proceedes as $46,000 & Allocation of Gross as $23,000 – so I enter for 1d $23,000; Line 1e is the cost basis – enter ½ of the City tax evaluation (1/2 x 69,600=34,800) $34,800 plus ½ of the expense of sale (1/2 x 3788.22=1894.11) $1894.11 for a total of$36,694.11 cost basis; Line 1f would then show a LOSS of $13,694.11 in parenthesis. Now this total then get entered into Form 1040 Line 14 with the loss amount in parenthesis. I am a beginner at this process so please bear with me and correct me where I have got it wrong. If applicable where do we enter the fee paid to the nursing home ? Or is this also added to the Line 1e basis of cost? I also presume that her brother must file the same Schedule D (minus nursing home fees) with his tax return. Is this all correct ?/ I would appreciate any help anyone can give on this matter.

Just a couple of thoughts - Gain/Loss on sale of inherited property is treated as long-term. The amount of capital loss you can use in any one year to offset your other income is limited to $3.000. It would help to support your position if both beneficiaries use the same basis. However, based on what you describe above, I do not think the medical expenses are deductible as part of the basis. Decedent's medical expenses are deductible on the final return or on the estate return. You could possible deduct them as medical expenses if your mother was your dependent.

Thank You MLSNC... I think you are correct regards the medical deductions so that will be out of the problem. Now is the yearly limit of $3000 for both brother & sister. Meaning 3000 dollars each or is it $1500 each for a total of $3000? And yes the brother will have to file the same Scd D that is why I am doing the research 1st. Now what I need is an answer to the specific line entrys on the Sch D . By the way the form states property held less than 6 months is short term gain / loss... is this canceled and becomes long term because of inheritance?
Once again thank you.

Hello dps0. Let me clear up a few things for you:

1. Your wife's cost basis in the house is 1/2 the fair market value as of her mother's date of death, which is not necessarly the same as the assessed value. Ideally you would have an appraisal done so that you can justify the figure to use for this.

2. If the house is sold at a loss, you can not deduct it. This is because the house is considered to be your wife's personal property, not an investment. Therefore, there is no need to report the sale on schedule D if it's a loss. If it's a gain, then you do have to report it. Gains from inherited assets are always considered to be long term, regardless of how long the heir actually owned it.

3. Your wife had no obligation at all to pay the nursing home fee from her share of the proceeds of the house sale. The estate is responsible for bills of the deceased, not the heirs. Now, what should have happened is the following: The esate pays off all final bills using whatever cash and/or securities the deceased may have had. If more cash is needed to settle final bills then the estate sells the house to generate cash. Then after the house is sold and all bills paid, the estate is settled and the remainder of its assets (if any) are distributed to the heirs.

Hope this helps.

Thanks ebaines... Regards #2 reply - If we do not have to do a Schedule D due to loss on inherited property, then what does she do with her 1/2 of the money received from the auction of the house as pertains to taxes or income ? We are new at estate settlement game and have made a number of mistakes that we won't repeat in the future. Once again thank you for your reply and hopefully you can shed more light on our problem.

There are no inheritance taxes to worry about here (at least not federal inheritance taxes - you should look into whether your particular state has its own version of an inheritance tax). So for federal income tax purposes there is absolutely nothing to report with respect to the property she inherited. But now since she sold it - she would have to report any gain on that sale if there is one as described earlier. However, given the relatively short time she owned the property and the fees she had to pay to get it sold it seems doubtful that she would have a gain. If there's no gain on the sale, then there's nothing to report on her income tax.

One last item - although there are no federal inheritance taxes, there is a federal estate tax, which is something the executor of the estate would handle prior to distributing the remaining property to the heirs. So heirs do not need to worry about paying estate taxes - only the executor of the estate does. And federal estate axes only come into play if the value of the estate is $2M or greater. Although again, your state may have its own estate tax, which presumably the executor has taken car of.