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,
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.