My mother died recently, and I am now 50% owner of her house. My brother owns the other 50%, and the house is in another state. It has a very small 100K mortgage, and right now has about 600K in equity.
This is one of those "explain this to me as if I were five years old" moments. I have never been a homeowner, and have very little knowledge of about what this will mean when tax time comes around. I am a noob.
I can deduct part of the mortgage, right? What about property taxes? Do I need to file in state where the house is, even if I do not live or earn income there? What paper work will I need come tax time? Since it is inherited property, would I get the stepped up cost basis when it comes time to sell? What else do I need to know?
Links to nice articles written for people like me are welcome. I just want to make sure I pay the piper properly and keep the wolves at the door.
Thanks in advance.
I am now co-owner a a house and I am totally clueless
byu/Teaching-Weird intax
Posted by Teaching-Weird
18 Comments
Who is the executor of her estate? They should ask the lawyer handling everything that knows the applicable state laws.
On a 100k mortgage, the interest expense that is deductible probably will not be enough to worry about assuming you take the standard deduction at tax time.
I’ll defer to others on the property tax and if that requires you to file another state return.
I also don’t know the rules about inherited property and what cost you need to consider when selling, but you using terms like “stepped up cost basis” makes me believe you are not as “very little knowledge” as you claim.
Will you be renting it out, letting it sit empty, or will your brother/or you move into it?
If renting out, it becomes something bigger and based on your question, might be best to hire a CPA.
If letting it sit empty, you and your brother can take the mortgage interest paid and any real estate taxes and divide them up however you see fit. Obviously can’t claim more than paid but it can be 100/0, 80/20, 50/50, etc.
You should have gotten (or getting) an appraisal as of the date of death, that is your step up basis. $700k home, you each have basis of $350k (plus closing costs) when it’s time to sell.
Unless you make it your primary residence or a rental, you will not need to file in the state it is in. See above, if you make it a rental, hire a CPA as it could get complicated.
That should answer everything – hopefully someone will chime in if I’m missing anything.
Are you keeping the house or selling it?
Find a good accountant that can look at your entire financial situation and help you come up with a plan.
**Everybody** is assumed to have **some** non-taxable income (stuff that you “deduct” from your income before you compute your tax based on what’s left).
Everybody is assumed to have **some** medical expenses, and **some** tax payments, and **some** charitable contributions, and **some** interest maybe … and you are allowed to deduct those from your income via the “Standard Deduction”. More importantly, you do NOT have to **document** ANY of these expenses; the current tax code just assumes that everybody has **some** deductible expenses.
IF you have MORE of those deductible expenses than the Standard Deduction, AND YOU CAN DOCUMENT THEM. then you can deduct the higher number instead; this is called “Itemizing” your deductions.
So, some things to consider:
* You can only deduct expenses that YOU ACTUALLY PAY. If your brother makes the mortgage payments, and you pay the property taxes … see where this is going?
* If you’re only paying for half a house, and half the taxes, you MAY not have enough deductible expenses to exceed the Standard Deduction.
* You DO need **some kind** of property appraisal “as of the date of death” or close to it. You don’t need this for today’s taxes, but for when you sell the house so you can calculate your “profit” on the sale.
* On the other hand, if you sell it soon, so that there isn’t much of a “profit” (based on the stepped-up basis), you may not have to report the gain at all in the first place — especially if you’re only selling half the house.
Enough for one sitting. Digest that, come back with more specific questions when you have them.
If you and your sibling are co-obligors and split payments equally then you each can deduct half of the mortgage INTEREST. Not the mortgage itself, obviously.
If only one heir pays all the interest then that heir alone may deduct it (the other cannot).
Theoretically, if neither is personally liable (e.g. bank never transfers note to them) then technically, no one can deduct it until they refinance in their own names. This is very unlikely, since banks are forbidden from demanding a mortgage be concluded when their customer dies and has heirs, so they usually are pretty quick to offer to transfer the mortgage to the heirs since you two are alive. IRS Pub. 936 governs this.
As far as I know, the property would get a step-up in basis to its fair market value (FMV) on the date of death. This means that if you two decide to sell the property right away there’s basically no gains to report because your combined basis equals the property’s fair market value (FMV) at the date of death. Even if you sell a month or two or three later for a little bit more, the difference would be just short-term capital gain.
Property taxes deduction is pretty much the same as the mortgage interest—you both have to pay the property taxes to get a deduction for it. Obviously if one of you pays it entirely the other can’t claim half of it on their taxes
Who is living in it going forward?
To my knowledge, the stepped-up cost basis would be calculated from what the property was worth on the day of your mother’s death, versus the amount you sell for in the future. I’m going through this with my late mother’s house that we are trying to sell. She did not have a mortgage, so I don’t know how that factors. We listed the house at the 6-month mark after the lawyer was able to transfer the property to me and my siblings, so there will not be any appreciable increase from the date she passed.
You both need to hire a CPA and or some attorneys to help figure this stuff out.
It is very unlikely that you will itemize for your taxes meaning that the interest paid will likely be well under the amount needed to start itemizing. Plus, you can likely only claim 1/2 of the interest paid anyway. NAL so talk to one.
You and your brother are on the hook to pay the property taxes. That may also be deductible but again, unless you are in a situation where you have a lot of things to deduct, this won’t push you over the threshold to itemize. Again, talk to a lawyer.
You may be on the hook for 1/2 of the value of the property from a tax perspective. Talk to a lawyer to understand your liability.
You and your brother are also on the hook for maintaining the property. Utilities, repairs, landscaping….. this is a great way to dive into this, but if you don’t want to or can’t move, consider selling. Do that with advice from an attorney because you may owe tax on the proceeds from the sale of the house if you don’t then use it to buy another… NAL – contact one.
Condolences for how you got the property. May you both figure out what the right thing to do is.
No, you do not get to deduct the mortgage. This has to be your personal residence to do so. Is it? You live in another state.
and – besides that – the standard deduction has been raised significantly.
your best bet is to sell this and get out of it. Either you and your brother sell it together (best option) or you sell it to him,
You can rent it – is this what you want?
You on good terms with your brother?
You should sell the thing ASAP. And take advantage of the stepped up basis. The longer you hang on to it the more complicated it’s going to get especially if you use it as a rental, or your brother lives in it etc You really just ought to dump it now if you can.
When you get access to the mortgage payments there is a section for taxes. You’ll see the interest, and taxes you paid for the year. I use turbo tax and it walks you through on what to do.
stepped up basis so if you sell now there’s no capital gains and thus no taxes on the sale. keeping it makes no sense unless it’ll become a rental property and generate profit over and above the mortgage payment PITI and maintenance expenses
Most likely you don’t need to file in the state with the house unless it is generating income – except probably in the year you sell it. Yes, you should be able to deduct your share of the mortgage interest and property taxes. Most likely, there is a step up in basis to Fair Market Value on the date your mother died. However, as with everything, it depends (like if the house was in a trust or something).
Do you want to keep the house? If not, you and your brother can sell it — the mortgage will be paid off with the purchase money, and you walk away splitting the net proceeds. Or you or your brother can buy the other out.
If you both keep it, you can just continue to pay the mortgage, no need to refinance (see Garn-St Germain Act). You’ll have to agree to split the costs of ownership, including taxes, insurance, repairs, and maintenance.
If you haven’t already, you need an appraisal done for date of death, as that will be your cost basis (half for each of you). You may be able to deduct your half of the mortgage interest and property taxes, but only if itemizing takes you above the standard tax deduction.
I’d try to eat the house. Like one bolt at a time. Put it on YouTube then use the money to pay for tax services.
You only need to file in that state if you rent out the house. Otherwise it’s just a second home.
You also need to file in that state if/when you sell it.