November 11, 2014 in Taxes

Calculating cost basis of inherited property

Dear Tax Talk,

I need to find the cost basis for an inherited family house that I sold. It was jointly inherited by my brother and me in 2001. I inherited his half when he died in 2011. Is there a formula for calculating the cost basis of an inherited home to report capital gains?

— Jean

Dear Jean,

To calculate your basis in the family home you are selling, you will need to know the value of the home when you inherited it with your brother in 2001 and also the value of the home when your brother died in 2011.

When real estate is inherited, it receives a step up in basis to the date-of-death value. Your situation is especially complicated by the fact that you inherited 50 percent of the property in 2001 and then the other 50 percent in 2011. So let’s say in 2001, the family house had a fair market value of $200,000 when you and your brother inherited it. Your 50 percent share at that time had a basis of $100,000. Now let’s say that when your brother died in 2011, the fair market value of the house was $300,000. You then inherited his 50 percent share and your basis for this portion of the property was $150,000.

You now own 100 percent of the property and your basis is $250,000 ($100,000 from 2001 and $150,000 from 2011). When you sell the property, you will take the gross amount realized from the sale less the selling costs and your “basis” to arrive at your gain or loss that will be reported on your tax return.

Thanks for the great question and all the best to you.

Ask the adviser

To ask a question on Tax Talk, go to the “Ask the Experts” page and select “Taxes” as the topic. Read more Tax Talk columns.

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.

Bankrate’s content, including the guidance of its advice-and-expert columns and this website, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this website is governed by Bankrate’s Terms of Use.