Question

My siblings and I inherited a small house and I ended up buying them out for a total of $6,000. I renovated the house and sold it. Can I add the $6,000 to calculate FMV?

Forum|Forum|2 years ago
April 27, 2024
3 replies
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The house was in disrepair and we renovated it. I know I can add the FMV, renovation costs, and realtor/broker commission when calculating the cost basis for the home, but can I add the amount I spent buying out my brother and sister to take full ownership of the house?

TurboTax Online

M-MTax

Can I add the $6,000 to calculate FMV?

Yeah, the $6,000 would be added to your basis.

O

Opus 17

Employee

I would say that you can add the buyout cost to your adjusted basis if you paid a fair price that was similar to (or less than) what you would have paid if the house was co-inherited by an unrelated person. If you paid more than a fair price to your siblings, it could get a bit complicated, but I am not an expert in that area.

P

pk12_2

Employee

@USM Professor , what I see here are two different issues :

(a) Regarding "FMV" ---- Fair Market Value of the asset inherited is important in establishing the basis of the property being transferred and ONLY at the time of death of the decedent. Thus in your case the FMV of the transferred ( by inheritance ) asset/house ( as is & where is ) is FMV -- FMV/3 for each of the inheritors ( assuming that there are a total of 3 inheritors including yourself).

(b) Regarding buying out the other two inheritors ---- Based on the above ( basis of each inheritor being FMV/3), if you paid $XX to each of the other inheritors to acquire their portion of the inheritance, then your basis of the asset obviously goes up by the amount you paid to acquire their share of the inheritance. Thus if you paid $AAAA to each of the other owners, then your basis in the asset now becomes $ ( FMV/3 + AAAA + AAAA ). A point to note here is that the amount paid to acquire each share ( $AAAA) is less than the FMV / 3, then each inheritor has given you a gift of FMV/3 LESS $AAAA and this may need to be reported ( depending on the exact amount and the yearly free gift amount ). In short and besides other considerations, your basis in the asset is FMV/3 plus any monies paid to acquire the shares of other inheritors Plus cost of any improvements prior to sale.

Thus your taxable gain is Sales Proceeds ( Sales price LESS sales expenses like commission, sales prep expenses, transfer taxes , title insurance etc. ) LESS your Basis ( as defined above )

Does this make sense ? Is there more one of us can do for you ?

U

USM ProfessorAuthor

Thank you, PK.

I appreciate your clear explanations. It is useful to know I may need to consider the "gift aspect."

BTW, it was much more complicated than what I mentioned in my original question, I'll share a little with you for your amusement...

Actually, my brother had a will drawn up so I would inherit the house - probably because I kept in regular contact over the years and provided regular care for him the last 8 months of his life. (My siblings couldn't.) I travelled to Arizona from Maine several times and in his last dying days, but he didn't want to think about dying so I did not push him to sign the will out of respect.

After his death, we had a buyer who signed a contract to buy the house "as is" for $26,500. Up to that point, I personally paid around $15,000 for his needs/bills and for assisted living, and after his death, another ~ $2500 on home insurance, utilities, real estate taxes and other miscellaneous expenses before buying them out. That makes the net total remaining ~$9000 ($26,500 - $15,000 - $2500), thus, $3000 each, which my siblings agreed to accept. (From my reading, the $15,000 and $2500 cannot be added to the basis, but my siblings agreed that they wanted me to be reimbursed.)

THEN, the man who offered us $26,500 tried to scam us and two separate buyers - he forged my name on sales documents for buyer #1, forged "the estate of" my brother's name for buyer #2 - AND set the closing for the two separate buyers on the same day. Fortunately, I caught him and we stopped the sale through the two different title companies. He also threatened to put a lien on the property which would be fraudulent - the county recorder's office explained that anyone could put a lien on a property and it would be recorded, even though there was no legitimate claim. (He was just angry I stopped him.) All of this occurred over several months. (It was an empty threat - he never filed a lien.)

After this fiasco, I spoke with my brother and sister who said they would be happy to sell out to me for $3000 each so I could renovate the house to sell it. (They didn't have the funds or expertise to participate in the rennovation.)

I then spent $31,000 of my money to renovate the home over an 8-month time frame. It sold and I was able to just barely break even - it ends up that my capital gain would be exactly $184.25 - without factoring in the $6000 total I paid my siblings.

So, in total, each of my siblings received $3000 and my gain was $184. I am happy that it is all over and I am past the worst of it.

BTW, I am leaving out some of the challenges, like the home was repeatedly burglarized - before the deed was transferred - by the drug dealer across the street and the meth addict who lived in the house behind my brother's house. (No one was charged, but when the drug dealer - who had served 25 years in prison for murdering his business partner - asked what we did with my brother's guns, it gave it away. Neighbors and people who knew the drug dealer and meth addict also verified they had talked about their caper.) BUT, the meth addict neighbor committed arson and burned his house down (so he moved out) and the drug dealer/convict sold his home so the neighborhood was back to its quiet, lovely condition.

Now we can live happily ever after, my siblings ahead $3000 each and myself ahead $184.25 before capital gains taxes.