Tax Experts
Tax on Maintenance and Sale of Inherited Property
By Kevin McCormally, Editorial Director, Kiplinger.com
April 2008
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Q: My two sisters and I inherited my father's home when he passed away last August. It has been up for sale since last fall, but has not sold. There is no mortgage on the home. My father owned it outright.
I have two questions:
1. We have spent money maintaining the home since last August. Can that money be claimed on our income taxes?
2. When the home sells, will we be required to claim the revenue gain? -- Judy P.
Kevin's Answer
I think you can treat the maintenance expenses as investment expenses, since they are paid in connection with this investment property. The problem is that investment expenses are considered miscellaneous itemized expenses, deductible only to the extent that all your miscellaneous expenses exceed 2% of adjusted gross income.
Now, if an income tax return must be filed for the estate (to report income and deductions after your father's death and before assets are distributed), you might be better off having the estate reimburse you for the costs and having the estate claim the investment expense deduction . . . if the 2% "haircut" would be less costly.
As for tax on the proceeds when you sell, you need to know that the tax basis of the home is what it was worth the day your father died. That's the so called "stepped-up" basis rule which effectively wipes out the tax on any and all appreciation that accrued during his lifetime.
Only if the proceeds of the sale (after commission and other expenses of the sell) are more than the home's value on the date of your father's death do you have any capital gain to report. In fact, if the proceeds are less than the value when your father died, you and your sisters have a capital loss to deduct.
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