[Stubits]

Thanks in advance for any help you can offer.

My sister and I recently sold a house we inherited from our parents a year ago. I am trying to figure out the tax implications. My understanding is that the tax basis for the home was reset upon the death of our father. Given the state of the economy, we ended up selling the home for less than it was worth at the time of his death. Also, the home is well below the $2mm limit for federal inheritance tax. The house is located in New Jersey, I am located in Washington, DC and my sister is located in Massachusetts. The proceeds from the home were split equally between us.

My understanding is that because the home is valued at less than $2mm, there is no inheritance tax, right?

My understanding is that federal income tax is computed on the gain, or profit, from the home sale. In this case, there was a loss, so am I correct that there is no federal income tax liability?

How about state income taxes? Does it follow the same model as the federal income tax, which is to say that since there was a loss, no income tax?

When filing our taxes this year how do we prove the loss? The estate did not conduct an assessment of the home's value, however property values dropped significantly across the board and there are comps available from around the time of death that show the loss.

Any thoughts would be appreciated.

[ebaines]

I think you are confusing inheritance taxes, estate taxes, and income taxes. First, with respect to inheritance taxes - there are no inheritance taxes due because there is no federal inheritance tax, nor state inheritance taxes imposed by MA or DC. And while NJ does have an inheritance tax, direct descendants of the deceased are exempt. So you're clear on that score.

As for estate taxes, if any estate taxes were due upon your father's death the executor would have been responsible for determining the amount, filing an estate tax return, and paying the taxes due from the assets of the estate before distributing the remainder to the heirs. You say the house was worth less than $2M, but if he had significant other assets that could have made his estate taxable. The heirs are not responsible for paying any estate taxes - the executor, not you, needs to worry about that. One other thing, if your father was an NJ resident - NJ's estate tax kicks in for estates worth $675K or more, and the executor is responsible for taking care of that out of the estate's assets.

You are correct that the cost basis for the house you inherited is the fair market value as of the date of your father's death, and so if you sold the property for less than that amount there is no income tax due, as you sold it at a loss. The bad news is that you can not take a loss on this sale, since the house is considered personal property (assuming you did not rent the house out after you inherited it). Same thing for state income taxes. As for proving the cost basis for the property - the executor should have furnished you with an appraisal. If he didn't you should hire a professional real estate appraiser to do it now, using property values appropriate for your father's date of death.

[Stubits]

EB Haines-

Thank you very much for your guidance. Apologies for any confusion.

The total value of the estate was less than $650k, so I believe all is well regarding the estate taxes.

Regarding the income tax, I am OK not taking a loss, I am just grateful to know that we will not have to pay state income tax on the property. Unfortunately the executor did not conduct an appraisal and we've already sold the home. I assume the appraiser would need access to the home, right? I suppose we can ask for permission from the new owners. Is the appraisal filed with the IRS come tax time, or is it more a matter of backup in case of an audit? We have a great comp in that the same month my father passed away the house next door, identical in design and size and of comparable or lesser finish, sold for $65,000 more than what we ended up selling for. Does this help, or is an appraisal absolutely required? That said, just to confirm, assuming we did in fact experience a loss, no income taxes will be due at the state or federal level, correct?

Thanks!

[ebaines]

Since you sold the house at a loss and it was not an income producing property there really is nothing to report for income tax purposes. So it is doubtful that anyone will come after you for proof of the cost basis.

[Stubits]

Thanks so much. Good to know.

Who usually sends the IRS paperwork, the buyer's lawyer or the seller's lawyer? I don't think either fully appreciates the issue and want to raise it before anything is sent to the IRS.

Thanks!

[ScottGem]

What IRS paperwork? I don't think there is any IRS paperwork sent during the sale of a home. When you file your return, you have to list the sale of the house.

[Stubits]

I believe a 1099-S. http://www.irs.gov/pub/irs-pdf/i1099s.pdf

[ebaines]

I believe a 1099-S. http://www.irs.gov/pub/irs-pdf/i1099s.pdf

Correct - there may be a 1099-S filed by whomever did the closing. But again, you have no obligation to report the sale on your income tax if it is a loss. So yes, the IRS could come back later with an inquiry when they see that you didn't report anything on your income tax, and if they did it would be best for you to have an appraisal in hand to prove the loss. You would probably sleep better at night if you got the appraisal now, but I don't see any downside if you wait and see whether the IRS does inquire about it. That is, as long as you are absolutely sure that such an appraisal will show that the home lost value as you think it has.

[Stubits]

Thanks! Can I request that a 1099 NOT be filed?

Also, any ideas what an average appraisal costs? They'd need access to the home, right? It is just complicated because we sold it already.

Thanks!

[ebaines]

Thanks! Can I request that a 1099 NOT be filed?

Also, any ideas what an average appraisal costs? They'd need access to the home, right? It is just complicated because we sold it already.

Thanks!

Talk to the closing agent and ask! I believe they are not required to file 1099-S if they are satisfied that the sellers owe no taxes on the sale.

As for the appraisal - ask. I think that an external appraisal togther with tax records (which would show acerage, square footage, number of bedrooms and baths, whether the basement is furnished, etc) may be sufficient.

[AtlantaTaxExpert]

ALL CONCERNED:

An alternative solution is to report the sale with NO gain or NO loss on Schedule D on your and your sister's 2009 tax return.

That way, the IRS has a official record of the sale to account for the Form 1099-S.

[Stubits]

That's a great suggestion. I am not looking to hide anything, just don't want to pay any more taxes than necessary.

In that case, the home appraisal would serve as backup in case of an audit, right? There would be no need to submit an appraisal to the IRS or anything, right?

[AtlantaTaxExpert]

Correct.

Do NOT submit the appraisal with the tax returns, but rather keep it available in the unlikely event of an audit.

[Stubits]

Excellent. Thank you!