What are the tax consequences when we sell the house my wife inherited from her father?
Tax Professional Answers
This is best illustrated through an example. Let's assume they purchased the house in the 50's for $10,000. When her mother passed away, their father inherited her half. Assume the FMV at that time was $110,000. Half of that was inherited, so his basis is now $5,000 + $55,000 = $60,000. That is his original half plus the inherited half.
Then he gives an interest in the house to your wife and her sister. When a gift occurs, the donee receives a transferred basis in the property gifted. Since his basis was $60,000 each of them have a $20,000 basis in their share of the house.
When he died, the sisters inherited his 1/3 of the house. Assume that the FMV on the date of his death was $240,000. His one third is $80,000 so each sister adds $40,000 to their basis. $40,000 + $20,000 =$60,000 is the basis each has in the house.
When the house is sold they will have to pay tax on the sale price minus costs of sale less their basis of $60,000. So if the house is sold for a net $250,000 each of them gets $125,000. Subtract their basis, and they pay tax on $65,000. This will be taxed at the capital gain rate.
The only effects of a delay in the sale are 1) change in the gain due to increasing or decreasing prices, or 2) An increase (or decrease -unlikely) in the capital gain tax rate.
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