Cap Gains or Loss on TX Inheritance Property?

2 Replies

Crossposted in Texas forum

Hi,

I'm in Texas and my dad passed away nearly 2 years ago. I inherited his home which is paid for. I've been living in it and have done heavy home renovations. I know that if I put it up for sale (before my 2yr live in anniversary), I am subject to capital gains tax on the difference between the cost basis (FMV) at the time of his death subtracted from the sale price. However the following may affect the tax.

1. I did not get an appraisal but I did get a home equity loan to do renovations. I'm assuming the cost basis will be based on that loan value on the house. I think they had to do an estimate of value for me to get the loan.

2. I'm self employed and my adjusted net income is about $25k which I read is in a cap gains bracket of 0%. Is this the case?

3. I have done at least $15-20k in renovations. Does this count as capital improvements? Does this get added to cost basis?

a. Example: House cost basis $180k, sale price $195k, cap gain is $15k, renovations $20k, cap loss is $5k

4. If I do owe 0% after the sale b/c of lower income, do I still qualify for a capital loss? Renovations included new granite in kitchen and bathrooms, new commercial stainless kitchen sink, new vessel sinks in bathroom, new tiled shower, new vanity mirrors and fixtures, new LED lighting and 4 ceiling fans throughout, new vinyl plank floors with new carpet in bedrooms, new interior and exterior pain, stained deck, new fence on 3 sides, chimney repair, new cabinet hardware and new door hardware throughout, new plumbing fixtures, added channel/french drain at end of driveway for water pooling, added drainage near front of house to divert rainwater, added landscaping beds, river rocks and pavers in backyard in shaded area where grass will not grow, replaced IG thermal glass window.

Originally posted by @Shirley McLean :

Crossposted in Texas forum

Hi,

I'm in Texas and my dad passed away nearly 2 years ago. I inherited his home which is paid for. I've been living in it and have done heavy home renovations. I know that if I put it up for sale (before my 2yr live in anniversary), I am subject to capital gains tax on the difference between the cost basis (FMV) at the time of his death subtracted from the sale price. However the following may affect the tax.

1. I did not get an appraisal but I did get a home equity loan to do renovations. I'm assuming the cost basis will be based on that loan value on the house. I think they had to do an estimate of value for me to get the loan.

2. I'm self employed and my adjusted net income is about $25k which I read is in a cap gains bracket of 0%. Is this the case?

3. I have done at least $15-20k in renovations. Does this count as capital improvements? Does this get added to cost basis?

a. Example: House cost basis $180k, sale price $195k, cap gain is $15k, renovations $20k, cap loss is $5k

4. If I do owe 0% after the sale b/c of lower income, do I still qualify for a capital loss? Renovations included new granite in kitchen and bathrooms, new commercial stainless kitchen sink, new vessel sinks in bathroom, new tiled shower, new vanity mirrors and fixtures, new LED lighting and 4 ceiling fans throughout, new vinyl plank floors with new carpet in bedrooms, new interior and exterior pain, stained deck, new fence on 3 sides, chimney repair, new cabinet hardware and new door hardware throughout, new plumbing fixtures, added channel/french drain at end of driveway for water pooling, added drainage near front of house to divert rainwater, added landscaping beds, river rocks and pavers in backyard in shaded area where grass will not grow, replaced IG thermal glass window.

1. I did not get an appraisal but I did get a home equity loan to do renovations. I'm assuming the cost basis will be based on that loan value on the house. I think they had to do an estimate of value for me to get the loan.

- if the loan was right after the inheritance, the appraisal done for the loan will suffice to establish the FMV at the time of the death. Or, if your dad filed Estate tax return, the amount listed there should be used.  

2. I'm self employed and my adjusted net income is about $25k which I read is in a cap gains bracket of 0%. Is this the case?

- Depends, if you are married and your total income plus cap gain is less than around 79k, then yes. If your cap gain is less than around 55k, your rate might be 0%. 

3. I have done at least $15-20k in renovations. Does this count as capital improvements? Does this get added to cost basis?

-Yes, the improvements will be your basis. Not all the repairs will be the basis, but if you spend money on repairs when you were improving the property, then you can add repairs to the basis. This is an exception just for a primary residence. 


4. If I do owe 0% after the sale b/c of lower-income, do I still qualify for a capital loss? 

- No, you cannot claim a loss on the sale of a primary residence. 


Also, you don't have to be in there for 2 years total to exclude the gain under sec 121. If you are moving because of the work, health or unforeseen circumstances, you still get the partial exclusion.