[terryweaver2]

My mother passed away in 2002 and left me and my 2 siblings 2 pieces of property and a house she held the mortgage on. In 2007, we received money from the sale of the 2 pieces of property that were sold and money from an insurance check on the home that burned down in 2007. All of the money was divided between the 3 of us. How do I determine what I owe on my federal tax return this year? I noticed some questions on inherited money that said you owe nothing on amounts under 2 million. I got a total of 50,ooo. Do I owe taxes? Do I show this on my return at all?

[AtlantaTaxExpert]

The insurance check represents an INVOLUNTARY CONVERSION of the property. i.e. the house that burned down. Unless you lived in the house for two of the past 5 years as your primary residence, you must pay capital gains on the difference between the Fair Market Value of the house on the date of your mother's death and the insurance proceeds PLUS the sale of the real property on which the house was located. The conversion is reported as a sale with the effective date being the date of the proceeds check.

The same applies for the two pieces of property. You will owe, on a pro-rated basis, capital gains taxes on the difference between the Fair Market Value of the properties on the date of your mother's death and the proceeds from the sale.

This is a somewhat complicated issue, so I STRONGLY recommend you get professional tax help.

[MukatA]

The receiver of an inheritance does not pay any tax on the inheritance. You inherited a percentage of share in the properties in 2002. Your cost basis on 2002 is the fair market value of your part of the properties (less your share of amount to be paid).

Now you sold your property acquired in 2002 in 2007. You will report the profit or loss from the sale of the property on schedule D based on your cost basis.

Your property caught fire. So you have a casualty loss or profit depending upon what you got form insurance. Casualty loss is deductible as itemized deduction subject to $100 and 10% AGI rules.

[AtlantaTaxExpert]

MukatA:

Do not believe the casualty loss rule applies here.

Besides, they HAVE to account for the capital gains from the appreciation on the house that they received from the insurance proceeds. Reporting that gain (or loss) on Schedule D seems to be the correct way to address that issue.

[ScottGem]

I think some clarification may be in order here. But I'm not 100% sure I'm correct on this. First, what Mukats said about the receiver not paying taxes is, of course, correct. What that means though is the ESTATE is responsible for any taxes. Now if your 1/3 share was $50K, then the estate was probably under the threshold ($2mil) so no taxes were owed.

Since the estate was not liquidated immediately after death, a value needs to be placed on the assets of the estate as of the date of death. That becomes the cost basis for the heirs. When the assets are liquidated, the amount received is compared to the cost basis and a gain or loss is determined.

So, if you received $50K as a 1/3 share then the property sold for $150K. Lets assume a $12K (about 10%) gain in the last 5 years which means the cost basis was $138. Your profit, therefore was $4K and that's what you owe Capital Gains taxes on.

This is a simplification because the insurance issue complicates matters so I agree that consutling a tax professional would be the best idea.

[AtlantaTaxExpert]

Agreed!