My grandmother made the deed to her house 'transfer on death' to my brother and myself (50/50). I moved into the house with my family about a month before she died to be her hospice caregiver- so we've only lived in the house since June 2010. She died in July. We're now selling the house, which appraised for property taxes at 98K. The house has not been updated since the 70's though, and it's unlikely that we'll be able to sell the house for more than 80K. We may actually have to settle for quite a bit less than that. So once the house does sell, the proceeds will be split half and half between by brother and myself. My question is, does this 38K or so we'll each end up with after expenses need to be reported on our next tax return? If so, what kind of tax liability are we talking about here, so we have some idea what we need to hold on to for taxes? Also, I don't know if this matters or not, but the house is apparently not part of grandma's estate (which I am executing) specifically because she made the deed a TOD, so it would "pass under the estate/ will". She knew a lot more about this than I do. The attorney who is handling the estate is unsure about the tax implications of the home sale. I do know that the estate (excluding the house) is quite small as estates go, so there won't be any taxes on the estate.

Your grandma did the right thing - as you noted, by titling the peoperty the way she did it made it easy and quick for you and your brother to take ownership after her death. Good for her!

Now for the good news, and then the bad news. Good news is that there is no federal estate tax for estates of people who pass away on 2010, so no need for you to file anything with the IRS. And there is no federal inheritance tax either, so neither you nor your brother need report anything regarding the inheritance itself. Also I see you live in KS, which has neither an an estate nor inheritance tax - so you're free there. It's all good.

The bad news for you is: there is no federal estate tax in 2010. An implication of this is that the cost basis of the property you inherited is set equal to your grandmother's cost basis. In the bad old days when the estate tax was in force there was a provision that let heirs "step up" the cost basis of inherited property to equal the fair market value as of the data of death, which in a case like yours would mean you would have close to zero capital gains when you sell the house. But since the estate tax is abolished for 2010, so too is that step-up provison, and consequently you inherited your grandmother's original cost basis when you inherited the property. Which means when you sell the house you must report as capital gains the difference between the proceeds of the sale and your grandma's cost basis. Actually - you report half of that since you are splitting it with your brother, To figure her cost basis you must start with her original purchase price way back when she bought the place herself and add iin the cost of any capital improvements she may have made to the house over the years. If she bought the house many years ago, you may very well end up having to report a capital gain of $50K or so. So start looking through her records and see if you can find any details of what she paid for the property and improvements made.

The irony here is that while Congress thought it was doing a favor to middle America by abolishing the estate tax for 2010 (thanks to George W), the result is that you actually owe more in taxes than you would have otherwise. The short-sightedness of Congress can be absolutely astounding.

Oh, boy... Well, I guess I better start looking through some old papers. I'm sure glad I asked. That could've been a nasty surprise to start 2012. Thank you very much for your answer!

When you sell your house, you may have a long term capital gain. Your cost basis is the cost basis of your grandmother. Long term capital gain is 0 or 15% depending on your other income. However,

If you (includes your grandmother) owned your main home for two years and lived for two years in past five years, then you can exclude gain of up to $250,000. If you are eligible to exclude the gain, you do not report it on the tax return. Your U.S. Tax Return: Profit From the Sale of Your Home

Perhaps my initial post was a ittle too dire.

Upon further investigation I found the followoing information on the IRS web site: 2010 Brings Big Changes to the Estate and Gift Tax

It states (note: EGTRRA = "Economic Growth and Tax Relief Reconciliation Act of 2001") :

New Basis Rules for Property Acquired from a Decedent in 2010
For decedents dying before January 1, 2010, the basis property acquired from a decedent is the fair market value of the property at the time of the decedent’s death. This is sometimes referred to as “step-up” basis.

Under the EGTRRA, however, the basis of property acquired from a decedent who died in 2010 is the lesser of the decedent’s basis in the property, or the fair market value of the property at the time of the decedent’s death.

However, EGTRRA allows an executor to increase the basis of property acquired from a decedent who dies after December 31, 2009 by $1.3 million ($60,000 in the case of a decedent nonresident not a United States citizen). The executor cannot, however, increase the basis in any property above its fair market value at the time of death.

Also, EGTRRA allows the executor to increase the basis of property acquired from a decedent who died in 2010 and that passes to the decedent’s surviving spouse by an additional amount of $3 million. The executor cannot, however, increase the basis in any property above its fair market value at the time of death.

Not all property acquired from a decedent is eligible for the new increase in basis allowance. There are some important rules for determining which property is allowed to receive an increase in basis; especially for jointly owned property, property held in trust, property subject to a power of appointment, community property, and property acquired by the decedent by gift within 3 years of death. You can find more information about property that is eligible for basis increase under Property Eligible for Basis Increase.

From this I conclude that you do not have as dire a problem as I first thought. As long as her estate is values at les than $1.3M, you can increase the basis of your grandmother's property up to its fair market value as of the date of her death. Then when you sell it, you only have to report capital gains if the amount you sell it for is greater than this new basis.

You should report that information (fair market value of property held on date of death) on IRS Form 8939. It is my understanding that will be submitted with her final tax return.

Thank you so much for your very helpful answer!

Ok, thank you for the information! Very helpful! I do appreciate your time. :-)

Ok, thanks! I will need to get in touch with Grandma's accountant after the first, so I will make sure he knows about the house.

Also tax value has no real life meaning, that value is merely set for taxing property.

Esp with the economy and the value of homes going down. For example, in our neighborhood, tax values are about 200, 000 on homes, they are selling for about 40,000. So you need to find what similar homes in same condition are sellilng for. Also decide if you are going to do any repair.

issues, like condition of the roof, foundation, mold, and others can effect things greatly