Personal Finance: Ask the Experts

Get advice on money matters from The Bee's Claudia Buck and a panel of local experts

September 3, 2013
Are there any tax breaks with respect to an inherited home?

Q: "Hello,
I inherited my Dad's home in 2009 after he passed away in January of 2009. I continued to pay the mortgage but last year (2012) added some improvements to get the house ready for sale. It sold in September 2012 with me owing $18,000 on the mortgage. (It was paid off at closing). What kind of tax breaks are available to me ?

Thanks so much,
Sue"
Canton, GA

A: Whether there are any tax breaks available from the holding and sale of inherited real estate depends on how the property was used after the passing of the original owner. Assuming you are your father's sole heir, if neither you nor any of your family members used the property for personal purposes, then the expenses of maintaining the home, as well as a loss from the sale, would be deductible. Personal use would include living in the property or allowing someone else to live in the house at less than fair market rent.

Expenses for maintaining the property, such as insurance, gardening, utilities and ordinary repairs would be deductible as miscellaneous itemized deductions subject to the 2% of adjusted gross income limitation. This assumes that the property was not used for personal purposes nor rented. Property taxes would be deductible regardless of whether there was personal use or not.

Interest paid on the mortgage may be deductible as investment interest expense, once again assuming no personal or rental use of the home. If you did use the property for personal purposes, the interest may be deductible if the home was either your principal residence or "second residence" under the home mortgage interest rules. Otherwise, the mortgage interest would be considered a personal expense and nondeductible.

If the property was rented at fair rental value, the expenses incurred to maintain the property are deductible against the rent. Depreciation expense may also be deductible as a rental expense. Interest on the mortgage would be deducted as a rental expense, as well.

Expenditures improving the house need to be added to the "tax basis" of the property and taken into account in calculating gain or loss from its sale. The starting point for calculating the tax basis is the fair market value of the property as of the date of your father's death. Add to that the cost of the improvements that you made to the property.

Subtract the tax basis from the sales proceeds net of selling expenses to determine whether there is a gain or loss from the sale. If the tax basis is less than the net sale proceeds, you have a gain that is taxable regardless of whether you used the property personally or not, although there may be an exclusion if you used the home as your principal residence. If the tax basis exceeded the net sales proceeds, you may have a deductible loss, as long as there was not personal use of the property. Assuming the property was not rented, the loss would be a long-term capital loss.

If there was personal use of the property by you, either directly or indirectly (such as by allowing a relative or friend to live in the property at no or low rent), a loss from the sale would not be deductible. Similarly, the expenses of maintaining the property, other than the property taxes, would be considered personal expenses and not deductible.

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Meet Our Financial Experts

Claudia Buck

Claudia Buck is The Sacramento Bee's personal finance columnist. Read all her columns here. Contact her at cbuck@sacbee.com

Terri Carpenter

Terri Carpenter offers advice on job hunting, retraining and career counseling. Carpenter works at Sacramento Works Inc., the career and job training arm of the Sacramento Employment and Training Agency (SETA). With 15 years in the field, she has hands-on experience with everyone from first-time job seekers to career professionals seeking advice after a layoff or looking for a mid-career change. Ask her a question.

Carlena Tapella

Carlena Tapella is a partner in the law firm of Webb & Tapella Law Corp. in Sacramento. The firm specializes in estate planning and probate, such as estates, trusts, conservatorships and litigation. She is a past president of the Sacramento County Bar Association's Estate Planning & Probate Section. Ask her a question.

Kimberly Foss

Kimberly Foss, certified financial planner, is the founder of Empyrion Wealth Management in Roseville. With nearly 30 years in the financial industry, her clients include women in transition, small business owners, retirees and "pre-retirees." Ask her a question.

Jesse Weller

Gregory Burke, a CPA and tax expert with John Waddell & Co. in Sacramento since 1984, worked as an IRS tax auditor for six years. He’s a past chairman of the California Society of CPAs. Ask him a question.

Daniel Tahara

Daniel Tahara takes your questions about California taxes. Tahara, a spokesman for the state Franchise Tax Board, has 10 years of experience as a tax auditor. Ask him a question.



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