Bought out co-owners of inherited property...will we owe tax?

[Mary Ann Hall]

My mother-in-law passed away in December leaving her home to her four children. To help reduce the family drama my husband and I bought his three sibling's shares in March. We are making repairs so that a nephew can qualify for an FHA loan. Since he was one who inherited the property, we are confused as to whether he will owe no capital gains tax because he inherited, will he owe tax on 75% of the proceeds. My husband has given up trying to get a human at the IRS to provide guidance.

Thanks!! 

Mary Ann

[Account Closed]

It doesn't look like you will have a Capital Gains problem, but just for the sake of clarity, go through the analysis.

What is your basis in the property?

First, your husband inherited 25% interest in the property, so his basis in that is the Fair Market Value of the property at the time of death.  If you have an appraisal within 30 days of death, use that.  If you do not, look at the property tax records (they are not usually accurate, but that's all you have).

Next, your husband purchased the remaining 75% of the property from the three relatives.  Add the amount he paid to the figure above, and you have your basis in the property.

Now, add to this figure the amount you spent in order to make the property qualify for sale, whether for repairs or for capital improvements.  This is the total of your basis in the property, plus repairs/improvements.

Subtract this number, plus the closing costs, from the amount you are selling the property for, and you will have your Capital Gains, if any.

I hope this helps.  Let me know if you have a follow-up.