I inherited a home and made improvements. May I adjust the tax basis?

April 29, 2015 by Dave Du Val, EA
Two men fixing a roof

Hey Dave,

I have a question for you that I have been getting conflicting opinions on. I inherited a home in 1988 from my father. I sold that home during the 2014 tax year at a gain. I understand that this property is considered an "investment property" for tax purposes but my question is this:

I did considerable renovations on this property (new roof, new windows, etc., and have the receipts) to the tune of about 26K. Can I or can't I use the amount of improvements made (26K over 10 years) to the property to increase the adjusted basis on this home?

I have been told that IF the home was "purchased,” then, YES; but since the home was inherited, I MAY NOT use the amount of improvements to adjust the basis of this home!

I am in the middle of filing right now and could sure need your thoughts on this if you have a minute.

Thanks in advance, Dave. Your input is greatly appreciated!

Ted

 

Ted

Good question, and the answer is: Yes, the cost of renovations are improvements, and such costs paid by you after you inherited the home are added to your basis in the property. The costs of any improvements made by your father prior to his passing would not be an adjustment to your basis in the property, but they would be part of the calculation of your father’s basis.

Assuming there was no rental use of the property, your cost basis in the property on sale will generally be the fair market value of the property on the date of the death of your father, plus the costs of any improvements, plus or minus other adjustments, if any, plus the cost of the sale.

Deductibly Yours,

Dave

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Rhonda D. Guillory, EA
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Rhonda was a Seasonal Tax Return Reviewer at TaxAudit before joining the permanent staff as an Audit Representative in 2009. She has a Bachelor of Science in Computer Science and worked in the Information Technology field for 15 years before making a career change. Since transitioning to the field of income tax in 2003, she has prepared and analyzed hundreds of tax returns. Rhonda enjoys helping taxpayers and tax professionals learn and understand the fascinating world of income taxes. Currently, she is the Learning and Development Manager.


 

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