Capital Gain on sale of house by estate

snipped-for-privacy@hotmail.com wrote: : My mother passed away last month and my siblings and I are planning to sell her house. We had it appraised (as is) and let's say it appraised for $500,000. Its current condition probably requires that we replace old carpet (pet stains and odors) as well as paint the inside (maybe the outside too). One of the siblings is currently living in the house, but we expect him to move out and for us to be able to clean up and sell the house in six months. If the estate spends (for example) $30,000 on refurbishing costs and the house sells for $530,000 it seems that we would have a $30,000 capital gain liability.

: I realize that carpet replacement and paint are not considered capital additions to a home, but in this case (estate selling the house, appraisal before refurbishment) is there any way to avoid having the tax liability? Can the refurbishment costs be deducted from the gain in any way?

: Thanks.

: -- Couldn't the paintig, at least, if not also the new carpet be considered "fixing-up" expenses? I remember this from my tax course over 30 years ago.

Don't depend on me for tax advice.

Wendy Baker

Replacing wall to wall carpeting is an improvement that increases cost basis. Painting the exterior of the home to protect it against the elements extends its useful life and increases cost basis. Painting the interior walls is a repair to maintain current condition.

Your gain is figured by taking the selling price and subtracting the selling expenses (typically sales commissions, legal fees, paperwork fees, points paid by seller and any government transfer tax or equivalent paid by seller) and then subtracting the adjusted cost basis.

Thirty years ago you could subtract "fixing-up expenses" from the gain on selling a home. That was eliminated in

Bob Sandler

news wrote: : > Couldn't the paintig, at least, if not also the new carpet be considered : >"fixing-up" expenses? I remember this from my tax course over 30 years : >ago.

: Thirty years ago you could subtract "fixing-up expenses" : from the gain on selling a home. That was eliminated in : 1997.

: Bob Sandler

Thanks! So now are stuck with it if ou have to get people in to paint or fix things up to make the house saleable?

Wendy Baker

: I realize that carpet replacement and paint are not considered capital additions to a home, but in this case (estate selling the house, appraisal before refurbishment) is there any way to avoid having the tax liability? Can the refurbishment costs be deducted from the gain in any way?

Couldn't the paintig, at least, if not also the new carpet be considered "fixing-up" expenses? I remember this from my tax course over 30 years ago.

Don't depend on me for tax advice. ================= As noted by another reply, the fix-up expense within 90 days of sale rule is gone. However, if an expense was still necessary to effect the sale of the property, I would still include it in the cost of the sale. Granted, I may be thinking more of things like updates to current building code as opposed to cosmetic changes.

Since this is a sale of a property approximately six months after the death of a decedent, you may want to consider the alternative valuation. Granted, as these items are not capital improvements, the house itself may remain relatively the same, but in the meantime, you may have depleted $30k of cash from the estate, so gross estate may be lower.... As the estate tax rate is higher than the long term capital gain rate plus state income tax, this may be of advantage. Run the numbers.

Keep in mind, the alternative valuation date is available if and only if both the taxable estate and the estate tax amount are reduced.

Sidebar: My recollection is that fixing up expenses were never deductible. Prior to 1997, fixing up expenses reduced the amount that had to be reinvested in a new house to defer recognition of the gain on the old house.

Regards, Bill

You have a good memory. TRA '97 repealed section 1034 (excluding gain by buying a home for an amount equal to or greater than the adjusted sales price within a prescribed time period). 1034 defined the adjusted sales price as the amount realized less fixing up expenses. There were all kinds of caveats regarding the time period for incurring the expense, the time period for having paid the expense and a rule that the expense could not otherwise be a tax deduction or an amount used to compute the amount realized.

so how does the elimination of section 1034 allow the conclusion that expenses in readying a house for sale, particularly one that is not your personal residence, do not affect the tax consequences of the sale?

The law on adjusted basis only allows for cap improvements and the law on amount realized does not include deducting fixing up expenses from the sales price. There are also probably various opinions issued on this over time but I can not cite them.

My quick look on the internet says that if I were in this position I would be researching much more thoroughly. I get the impression that many items would in fact be a tax benefit, particularly if the house is not your primary residence but is iniventsmnt property.

I don't want to debate, just advising anyone in this situation to do some careful research. It is not a simple yes or no.

Under section 1016, anything properly chargeable to the capital account can be capitalized and deducted as such when property is sold. To the extent that fixing up expenses are considered capital, I'd guess that would mean they can be capitalized. If considered repairs, then not.

but if repairs, are they not deductible if the house is not your residence?

I have not researched this point, but I believe that would be correct.

Yes, those repairs that would qualify as a Schedule E deduction for rental property become a Schedule A deduction for investment property (property held to sell at a profit).

Keep in mind, the alternative valuation date is available if and only if both the taxable estate and the estate tax amount are reduced.

Sidebar: My recollection is that fixing up expenses were never deductible. Prior to 1997, fixing up expenses reduced the amount that had to be reinvested in a new house to defer recognition of the gain on the old house. =============== Not all sales had excludible gain.... The Section 1034 exclusion over age

The law on adjusted basis only allows for cap improvements and the law on amount realized does not include deducting fixing up expenses from the sales price. There are also probably various opinions issued on this over time but I can not cite them. ============== See Form 2119, line 11 for details. I referenced the 1987 copy of the form because that was the first one I found.

Instructions: "These are decorating and repair expenses incurred only to help sell the old property. You must have incurred the expenses for work performed within 90 days before the contract to sell was signed and paid for them within 30 days after the sale. Do not include capital expenditures for permanent improvements or replacements that are added to the basis of the property sold."

I am not saying that the old law permitted such expenses as an expense of sale. I am implying that CURRENT law may provide for it since the old law was repealed. The fix-up expenses did directly affect the deferred gain amount.