Income Taxes on Inherited House

Income Taxes on Inherited House

When my mother died she left her house to the 4 of us. My sister, who was also the executrix, of the estate wanted to buy it. The lawyer told us that the state of **** does not alow the executrix to do this. So the lawyer put it in all of our names. Than we sold it to our one sister. Do we have to pay taxes on the share that we got. and also i live in ***.


Sounds like your question is really about the tax consequences, not whether the executrix (the person managing the estate) could buy the house or not. On death, the assets held by the decedent, your mother, receive a step up in tax basis to their fair value at death. Let's illustrate this with an example. Assume that your mother paid $20,000 for the house, and the value went up to $500,000, then declined to say $350,000. If the estate lawyer titled the house in all four names (presumably as Tenants in Common, but perhaps in another manner) and the four of you sold it to your sister for $350,000, you should have no gain for income tax purposes. This is because on your mother's death the tax basis is increased from $20,000 she paid to the $350,000 value on her death (ask your lawyer if alternate valuation date values were used). If your sister later sells the house for $375,000, $25,000 more than she paid, she will have a $25,000 capital gain, which might be protected by the home sale exclusion.

A couple of variations might also be worth considering. If on the date of your mother's death the house was in fact worth $350,000, but when you sold it to your sister it was worth $375,000 and you sold it to her for $375,000, then you have a taxable gain. Since you were not living in the house you cannot use the home sale exclusion rules to avoid tax on that gain.

Another possible variation. If the house was worth $350,000 but you all sold it to your sister for $300,000, just to be nice, you've all made a gift to your sister and may have to file a gift tax return.

All of you should be certain to get adequate back up data from the lawyer handling the estate as to the tax basis so that if you have an income tax audit you will have the records you need to show that there was no gain (assuming that was in fact the case).

Be sure to give all the records the estate attorney gives you to your own accountant. Be sure to have this all reviewed by a CPA before taking any action or filing an income tax return.

We deleted the state names. We cannot and do not give any state or other specific legal advice.

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