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Death by Taxes, Part 3:

November 21, 2019

An introduction to the world of taxes in the year of death

Aunt Matilda passed peacefully in her sleep on June 25th, 2019. In the weeks following, as the family was cleaning out Matilda’s home, Frank began to panic about the tax consequences of his mother’s passing. Do I need to file a tax return for my mom? What deadlines do I need to worry about? What happens when we sell the home? Can I just assume her investments, tax-free? Don’t worry Frank, we are here to help.

If you missed Parts 1 or 2 of this series, check them out now to learn about the various tax forms that may be required in the year of death. In Part 3, we discuss the sale of the home.

Question 3: What happens when we sell my deceased mother’s home?

Selling the home of a loved one can be a complicated process without the added complexity of tax consequences. Below we discuss a couple of key points when it comes to taxes owed from the sale of the home.

Basis in the home:

The tax on the sale is going to be calculated based on the gain recognized from the sale. Gain is calculated as the difference between cost basis and the selling price. When a home is sold outside of an estate, the cost basis is the original purchase price, adjusted by the cost of any improvements. When a home is sold after the owner has passed, the cost basis is “stepped up” to the fair market value. In order to determine the fair market value, an appraisal may be necessary.  

Fair Market Value:

Depending on the type of property being sold, a formal appraisal may be required. Commercial property and income-producing property is much harder to value than a residential home. Therefore, it is best to get an appraisal done as quickly as possible after the owner has passed. This can relieve the estate of any ongoing complications in regard to value of the property.

As far as residential property goes, the IRS will usually accept the selling price as the fair market value as long as the home is sold within six months to one year. If the home is not expected to be sold within that time period, you don’t necessarily need a formal appraisal. Hiring a few brokers to walk through the home and give their best estimate should be sufficient.

Gain Calculation:

Assuming that the home is sold relatively quickly, there is typically little to no gain or loss, resulting in little to no tax due.

If you have any questions regarding anything you’ve seen in this article please contact attorney Diane Tiveron or Sarah DesJardins, CPA at 716-636-7600.

Be on the lookout for Part 4 of this series, where we will discuss the tax consequences of inheriting investment property, including IRAs.