How do I calculate tax after death of father, mother, or other relatives? by Jeff Brooks, CPA

Jeffrey Brooks, CPA, CFP, MBA for JBrooks Wealth Advisors, PC. 602-292-2009
We help our clients who inherit a house or other property from family or friends. There seems to be a lot of confusion on what to do for tax purposes. When you have assets that have not been sold by the time you close out the estate, those assets are transferred to the beneficiary (you) and any expenses that keeps the property in condition for sale are added to the investment amount.

Q: Harry Doe passed away on 8-1-2011. John Doe is the only beneficiary of the Harry Doe Estate. Harry Doe’s home is located in Milwaukee, Wisconsin and is part of Harry’s estate. The fair market value of Harry’s home was $200,000 at Harry’s death. ( It is very important to have the fair market value at date of death for tax purposes).

Q: Does John get the same benefits if the estate sells the house as he does if John sells the house?
A: The tax treatment is the same.
If the Estate transferred the house to John immediately after Harry’s death and John pays from his own fund for the costs incurred to get the house ready for sale, John does NOT lose the benefits of increasing the investment in the house from his payments from funds outside of the estate.

Q: What if John decided to move into this home as a residence?
A: None of the expenses related to the new residence are added to the investment.

Q: Does John get credit for paying off the mortgage?
John invests $18K (see below) and then sells the house for $206,000. Out of the proceeds John has to pay off the lien of $100K for mortgage. Does John increase his investment in the house to include the $100 pay off of the mortgage?
A: No, John does not get any credit for the payment of the lien. In another words, the pay off of the lien does not affect John’s gain or loss. I agree that doesn’t make sense but tax law doesn’t always make sense.

Q: Do these payments for the Wisconsin house help John increase his investment in the property?
A: Yes. John writes checks from the Estate checkbook of $18,000 for:
1. John’s travel expenses to Wisconsin to inspect the house and hire workers.
2. Storage facilities, utilities, home owner association fees, electricity, repairs, real estate taxes, mortgage interest, clean up expenses, etc. These payments ADD to the investment amount of the Wisconsin house.
Q: How do we calculate a gain or loss on the sale of the Wisconsin house?
A: John sells the Wisconsin house for $206,000, net of selling and closing expenses. The cost of the investment is $218,000 ($200,000 fair market value at death plus the $18,000).
If the house is owned by John, John reports the loss of $12,000. If the Estate sells the house, the $12,000 long term loss is reported on Harry Doe Estate and flows through to John. Whether the Estate sold the property or John sold the property, the $12,000 long term capital loss can be used by John to offset capital gains on his personal tax return.

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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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JBrooks Wealth Advisors, PC.

Certified Public Accountant
Address: 4647 N 32nd Street, Suite B245
Phoenix, Arizona 85018
Phone: 602-292-2009
Email: jeff@jbrookswa.com