Question

Capital Gains and Losses - Inherited Home

Accepted Answer

Your share of sales proceeds (generally reported on Form 1099-S) from the sale of an inherited home should be reported on Schedule D in the Investment Income section of TaxAct.

Enter "Inherited" as the date the property was acquired, then enter the cost basis, date of sale, and the sales proceeds. Note, you would only enter your share of the cost basis and sales proceeds in order to calculate the appropriate amount of gain or loss. To enter this information on Form 1099-B so it will transfer the data to Schedule D Capital Gains and Losses (long term) in the TaxAct Program:

From within your TaxAct return (Online or Desktop), click Federal. On smaller devices, click the menu icon in the upper left-hand corner, then select Federal
Click Investment Income to expand the category and then click Gain or loss on sale of investments
Click Capital gain or loss (Form 1099-B)
Click +Add Form 1099-B to create a new copy of the form or click Review to review a form already created
The program will proceed with the interview questions for you to enter or review the appropriate information

Per IRS Publication 523 Selling Your Home, page 10:

Home acquired from a decedent who died before or after 2010. If you inherited your home from a decedent who died before or after 2010, your basis is the fair market value of the property on the date of the decedent's death (or the later alternate valuation date chosen by the personal representative of the estate). If an estate tax return was filed or required to be filed, the value of the property listed on the estate tax return is your basis. If a federal estate tax return didn’t have to be filed, your basis in the home is the same as its appraised value at the date of death, for purposes of state inheritance or transmission taxes.

Per IRS Publication 559 Survivors, Executors, and Administrators, page 17:

Sale of decedent's residence. If the estate is the legal owner of a decedent's residence and the personal representative sells it in the course of administration, the tax treatment of gain or loss depends on how the estate holds or uses the former residence. For example, if, as the personal representative, you intend to realize the value of the house through sale, the residence is a capital asset held for investment and gain or loss is capital gain or loss (which may be deductible). This is the case even though it was the decedent's personal residence and even if you didn't rent it out. [#1]

If, however, the house isn't held for business or investment use (for example, if you intend to permit a beneficiary to live in the residence rent-free and then distribute it to the beneficiary to live in), and you later decide to sell the residence without first converting it to business or investment use, any gain is capital gain, but a loss isn't deductible. [#2]

If your situation falls under #1, then you may NOT have to make an adjustment when entering the sales transaction.

If your situation falls under #2, then you should select Adjustment Code L on the screen titled Investment Sales - Adjustment Codes when entering the sales transaction. On the screen titled Investment Sales - Adjustment Amount, the adjustment amount should be equal to the loss (since you are unable to deduct the loss).