Contact UsMy parents built a house in NC ten years ago. My father died 6 years ago. My mom has always been a resident of Florida.
She has rented the house off and on for the past 3 years. She just sold half of the house for $325,000.
How do we figure out what she owes capital gain taxes on? My father built the home himself over 3 years.
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Tax Professional Answers
John Stancil
First, her basis in the house depends on whether or not she was a co-owner when your father was alive. If this is the case, her basis is 1/2 of the original cost plus 1/2 of the fair market value at the time of his death. If he was the only owner of the house, her basis is the fair market value at the time of death.
Since he built the house, you may not have good records indicating the original cost basis. You will have to make a reasonable estimate, but the estimate cannot include the cost of his labor in building the house.
Second, while the house was utilized as a rental, depreciation should have been taken in reporting the proceeds of the rental on Schedule E. Whether or not it was taken, she must deduct from basis the amount of depreciation allowed or allowable during the rental period. Depreciation is determined on her basis in the house excluding the cost of the land.
Third, since she sold half the house, she must then deduct 1/2 of her basis from the selling price (less any costs of sale) to determine her taxable gain or loss.
Since the house is located in North Carolina, she will need to file as a non-resident, reporting the sale for North Carolina income tax purposes. She will be taxed only on the gain, not any income she has that is not related to NC.
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495 weeks ago
Since he built the house, you may not have good records indicating the original cost basis. You will have to make a reasonable estimate, but the estimate cannot include the cost of his labor in building the house.
Second, while the house was utilized as a rental, depreciation should have been taken in reporting the proceeds of the rental on Schedule E. Whether or not it was taken, she must deduct from basis the amount of depreciation allowed or allowable during the rental period. Depreciation is determined on her basis in the house excluding the cost of the land.
Third, since she sold half the house, she must then deduct 1/2 of her basis from the selling price (less any costs of sale) to determine her taxable gain or loss.
Since the house is located in North Carolina, she will need to file as a non-resident, reporting the sale for North Carolina income tax purposes. She will be taxed only on the gain, not any income she has that is not related to NC.
Bill Robinson, CPA
I would just add to John's comment that when the house was placed into service as a rental (assuming it was personal prior to) then the cost basis is the lessor of FMV at the time it is placed into service as a rental or cost plus improvements. This can be a trap for the unwary and given the fall off in FMV over the recent years, many homeowners paid more than FMV at time the personal asset is placed into service.
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495 weeks ago