Selling House after Mother Passed Away (Two Siblings)

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bowtieman81
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Selling House after Mother Passed Away (Two Siblings)

Post by bowtieman81 »

Hello Bogleheads,

My mother passed away in January 2022, and unfortunately she did not have a will or any estate plan in writing. She owned a small house in Illinois that my sister has moved into as of July. My sister is now paying the expenses for house and she is working on sorting and cleaning out all of our mom's stuff.

My sister and I have decided to sell the house and split the proceeds. We are planning to have the place ready to sell by November/December of this year. My question is how are the capital gains taxes handled? Doing some research it looks like any gain in value of the house after the date of mom's passing is subject to capital gains tax; is this correct?

If the above is true, how should the value of the house be properly determined? I ask because the house needs some work, and in reality it probably is not worth much more than mom bought it for about 5 years ago ($100,000).

Thanks in advance,
Pete
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retired@50
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Re: Selling House after Mother Passed Away (Two Siblings)

Post by retired@50 »

Have the house appraised by a recognized, professional appraiser in the area.

This will give the two of you an idea of what the house was worth when your mother passed away. This document could become meaningful for establishing the new basis in the house.

If you do additional work on the house, keep receipts and invoices to add toward the basis. Some things will add basis, others will not. The IRS has a publication called "Selling your house" which you might want to read.

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
Gill
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Re: Selling House after Mother Passed Away (Two Siblings)

Post by Gill »

I wouldn't bother with an appraisal. If you sell it within a reasonable time you can use the sale price as your basis resulting in no gain and perhaps a small loss arising from the selling expenses.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
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galawdawg
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Re: Selling House after Mother Passed Away (Two Siblings)

Post by galawdawg »

Sorry for your loss.

I assume the house was titled solely in your mother's name and was not titled in any form of joint tenancy. If that is the case, the basis of the house will be the FMV on the date of your mother's death.

You mention that you and your sister "have decided"...have you and/or your sister started the probate process in the state of your mother's residence (presumably Illinois)? I ask only because of the phrasing of that portion of your post. Opening probate is generally the required first step before real estate or anything else in your mother's estate can be sold or otherwise distributed.
bsteiner
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Re: Selling House after Mother Passed Away (Two Siblings)

Post by bsteiner »

galawdawg wrote: Tue Aug 16, 2022 2:20 pm ... Opening probate is generally the required first step before real estate or anything else in your mother's estate can be sold or otherwise distributed.
They can't probate the Will since there was no Will, though they may file for administration of an intestate estate.

However, the house may already belong to them by operation of law in intestacy.
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CAsage
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Re: Selling House after Mother Passed Away (Two Siblings)

Post by CAsage »

Save all the receipts for improvements/repairs. Yes the value is "set" as of January 2022, but if you sell it within a reasonable time (and a year is reasonable) then the IRS will generally consider it to be worth the sale price. Note that you can (oh happy day) deduct the selling costs (broker, escrow, legal, whatever) as capital losses on your tax return! Any legal process for selling the house is very state dependent.
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.
MarkNYC
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Re: Selling House after Mother Passed Away (Two Siblings)

Post by MarkNYC »

CAsage wrote: Tue Aug 16, 2022 3:30 pm Save all the receipts for improvements/repairs. Yes the value is "set" as of January 2022, but if you sell it within a reasonable time (and a year is reasonable) then the IRS will generally consider it to be worth the sale price. Note that you can (oh happy day) deduct the selling costs (broker, escrow, legal, whatever) as capital losses on your tax return!
In this situation, any loss upon sale would be nondeductible, because after the owner's death one of the beneficiaries started using the house as a personal residence, which disqualifies the house as investment property in the hands of the estate or the beneficiaries.
Big Dog
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Re: Selling House after Mother Passed Away (Two Siblings)

Post by Big Dog »

Others have answered your question, i.e., if you sell within a reasonable time frame, you get stepped up basis.

Given the market value, if it were me, I'd list it as-is, as soon as you can get the probate court to approve the Personal Representative. I would not put any money into fixing it up. Not even paint. Just clean-out furniture and personal belongings, and leave it broom-clean.
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galawdawg
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Re: Selling House after Mother Passed Away (Two Siblings)

Post by galawdawg »

bsteiner wrote: Tue Aug 16, 2022 3:27 pm
galawdawg wrote: Tue Aug 16, 2022 2:20 pm ... Opening probate is generally the required first step before real estate or anything else in your mother's estate can be sold or otherwise distributed.
They can't probate the Will since there was no Will, though they may file for administration of an intestate estate.

However, the house may already belong to them by operation of law in intestacy.
And I thought I had a tendency to be pedantic! :shock: :wink: I should have said "Filing an action in probate court to administer the estate is generally..." While I am not admitted in Illinois, I do believe that will be required if the real estate was titled solely in the mother's name.
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CAsage
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Re: Selling House after Mother Passed Away (Two Siblings)

Post by CAsage »

MarkNYC wrote: Tue Aug 16, 2022 3:47 pm
CAsage wrote: Tue Aug 16, 2022 3:30 pm Save all the receipts for improvements/repairs. Yes the value is "set" as of January 2022, but if you sell it within a reasonable time (and a year is reasonable) then the IRS will generally consider it to be worth the sale price. Note that you can (oh happy day) deduct the selling costs (broker, escrow, legal, whatever) as capital losses on your tax return!
In this situation, any loss upon sale would be nondeductible, because after the owner's death one of the beneficiaries started using the house as a personal residence, which disqualifies the house as investment property in the hands of the estate or the beneficiaries.
Would it be allowed for the Heir who isn't living in it? After all, they are splitting the property, so he's not living in his half. I can see that being an issue for the person living there - unless perchance they are just popping in/out to clean it and maintain another full-time residence? (This would meet the IRS test requiring them not to use the property for personal use - how far is Sister?). Just asking for specificity - this applies to some property a relative of mine inherited, where one of the heirs lived there before they sold it and split the money.
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.
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retired@50
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Re: Selling House after Mother Passed Away (Two Siblings)

Post by retired@50 »

Gill wrote: Tue Aug 16, 2022 2:15 pm I wouldn't bother with an appraisal. If you sell it within a reasonable time you can use the sale price as your basis resulting in no gain and perhaps a small loss arising from the selling expenses.
Gill
Gill,
I'd be curious what is considered "reasonable time" in a case like this?

Any idea?

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
Gill
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Re: Selling House after Mother Passed Away (Two Siblings)

Post by Gill »

retired@50 wrote: Tue Aug 16, 2022 6:35 pm
Gill wrote: Tue Aug 16, 2022 2:15 pm I wouldn't bother with an appraisal. If you sell it within a reasonable time you can use the sale price as your basis resulting in no gain and perhaps a small loss arising from the selling expenses.
Gill
Gill,
I'd be curious what is considered "reasonable time" in a case like this?

Any idea?

Regards,
I would think a year would be acceptable, particularly since the OP indicated the market had been flat.

Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
MarkNYC
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Re: Selling House after Mother Passed Away (Two Siblings)

Post by MarkNYC »

CAsage wrote: Tue Aug 16, 2022 6:11 pm
MarkNYC wrote: Tue Aug 16, 2022 3:47 pm
CAsage wrote: Tue Aug 16, 2022 3:30 pm Save all the receipts for improvements/repairs. Yes the value is "set" as of January 2022, but if you sell it within a reasonable time (and a year is reasonable) then the IRS will generally consider it to be worth the sale price. Note that you can (oh happy day) deduct the selling costs (broker, escrow, legal, whatever) as capital losses on your tax return!
In this situation, any loss upon sale would be nondeductible, because after the owner's death one of the beneficiaries started using the house as a personal residence, which disqualifies the house as investment property in the hands of the estate or the beneficiaries.
Would it be allowed for the Heir who isn't living in it? After all, they are splitting the property, so he's not living in his half. I can see that being an issue for the person living there - unless perchance they are just popping in/out to clean it and maintain another full-time residence? (This would meet the IRS test requiring them not to use the property for personal use - how far is Sister?). Just asking for specificity - this applies to some property a relative of mine inherited, where one of the heirs lived there before they sold it and split the money.
If two individuals inherit a home, and one beneficiary/co-owner lives there as a principal residence, I don't think the other beneficiary/co-owner can make a successful case that his co-ownership interest is investment property. Instead, it is co-ownership of a personal residence.
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