Inherited rental property

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Topic Author
Retired Papa
Posts: 3
Joined: Thu Jun 10, 2021 8:19 pm

Inherited rental property

Post by Retired Papa »

First time posting, long time lurker. I am one of the countless thousands that have been helped by the collective wisdom of this community. Many years ago I consolidated various 401k and IRAs into four index funds at Vanguard. I have been very happy with the returns and am not looking to change anything there.

My question concerns inherited real estate. My MIL had failing health and in 2018 she moved into assisted living. In July 2018 she rented her condo with a three year lease. Unfortunately she passed away in Feb 2019. My wife and her sister are co-executors of the estate and they decided that their mother would want them to honor the 3 year lease. The tenants were great and they just moved out last month. We put the condo on the market and it sold in 2 days almost $20k over asking price.

Now to my question: we had the condo appraised at the time of death and they came back with a pretty low number of $190k. We just sold it for about $250k. My understanding is that if you sell in a "reasonable time" then the sell price is considered the value and there are is no tax on the increased amount. In our case it has been 28 months because of honoring the lease. Does that mean we are liable for capital gains tax on the amount we realized on the $250k sale vs the amount we would have received from a sale at $190? Does the fact that we were leasing it out change things? I was about to contact a tax attorney but I thought I would reach out here first. Any thoughts?
SuzBanyan
Posts: 577
Joined: Thu Jun 02, 2016 11:20 am

Re: Inherited rental property

Post by SuzBanyan »

Yes, your wife and sister will have to pay tax on the capital gains for the sale of the property, plus the recapture of the depreciation during the years they rented it. As a positive, they received rent for more than 2 years and the current crazy real estate market probably resulted in a higher net sales price in 2021 than they could have received in 2019.

Probably no need for a tax attorney. Commercial tax preparation software or a competent CPA can help file accurate tax returns.
renue74
Posts: 1886
Joined: Tue Apr 07, 2015 7:24 pm

Re: Inherited rental property

Post by renue74 »

You pay cap gains based on step up basis as far as fair market value on the date of death. On the date the relative died, any depreciation started over. So you would only pay minimal recaptured depreciation.
Topic Author
Retired Papa
Posts: 3
Joined: Thu Jun 10, 2021 8:19 pm

Re: Inherited rental property

Post by Retired Papa »

Thank you for the response. It appears that after taxes, commissions, fees, etc we will have realized a little over $50k in increased value over the past 2 years. Since my wife and I are both retired and not yet collecting SS, we are living off of our savings and our income is almost nil. So for us it appears that there will be no capital gains on our portion of the $50k. Her sister and BIL are still working and making good money so their situation is different.

My remaining question concerns the comment you made about recapturing the depreciation. In my quick research so far it appears that I need to add the appx $11k that we have taken in depreciation to the $50k so that our realized gains were about $61k. Is that correct?
togb
Posts: 256
Joined: Mon Oct 23, 2017 8:36 pm

Re: Inherited rental property

Post by togb »

the profit will be taxed as capital gains. The recaptured depreciation is taxed as ordinary income.
Topic Author
Retired Papa
Posts: 3
Joined: Thu Jun 10, 2021 8:19 pm

Re: Inherited rental property

Post by Retired Papa »

togb wrote: Sat Jun 12, 2021 5:08 pm the profit will be taxed as capital gains. The recaptured depreciation is taxed as ordinary income.
OK. Thank you for the clarification.
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