Inheriting a House

Q: First let me say thank you for answering our questions like this. It is a very generous thing you are doing. Thank you.

Our mother died in March of this year and left everything to my sister and I in her will. However, she had only added my sister's name to the deed on her home. When we sell the house my sis is going to split the proceeds equally between us. Since my name was not on the deed at the time of death, how will that affect the amount of taxes I pay?

A: You're welcome.

Since your sister's name is on the deed, she is the owner. She... became a 50% owner when her name was added to the deed. She then received the other 50% as an inheritance.

The 50% that is inheritance gets a step up in basis. That means that the basis on that portion is the fair market value as of the date of death (or 6 months later). So there won't be much tax on that part, if any.

Her cost basis on the 50% she was gifted prior to your mother's death is 50% of your mother's cost basis. That means the amount your mother initially paid for the home plus any improvements.

She will owe capital gains taxes on the difference between the sale price of her 50% and the cost basis.

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