If my brother and I sell an inherited house, how do we determine our tax liability?

by William B. Boles, CPA | Aug 30, 2018

My brother and I inherited a house from our mother via an irrevocable trust. If we sold that house this year, how would we figure out our tax liability?

The transfer by your mother was a gift to you and your brother. If the value of the gift was large enough, then a gift tax return was required.
To compute the income tax liability, you need to establish the cost basis. The cost basis for sales is the cost basis in the hands of your mother at the time it was transferred into the trust plus any additional improvements after transfer into the trust until the date of your mothers’ death (termination of trust).
The taxable gain is then measured by the excess sales price (net of sales expenses) over the cost basis as calculated. If there is a loss, then you have to look at the fair market value at the time of transfer.

If the fair market value at that time was lower than cost, then the fair market value at the date of transfer into the trust is the starting point, plus any improvements after the transfer into the trust.

There are many different possibilities, so the answer to your situation could differ materially. I recommend consulting a CPA with all your specifics to determine your exact tax liability.

For more resources, check out PICPA’s Money & Life Tips, Ask a CPA, or CPA Locator.

Answered by: William B. Boles, CPA, is founding director of Boles Metzger Brosius & Walborn PC in Harrisburg, Pa.

The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
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