Contributed by: Henry FreeTaxUSA Agent, Tax Pro
The sale of an inherited home is a significant event that comes with its own set of tax implications and requirements. Understanding how to correctly enter Form 1099-S from a sale is crucial for accurate tax reporting and compliance.
Information required to report the sale
Typically, you will receive Form 1099-S reporting the sale of an inherited property which will show your sales proceeds. You will also need to determine your basis in the property to account for the sale correctly.
- The basis of inherited property is generally the fair market value (FMV) at the time of the original owner’s death.
For instance, consider a scenario where you inherit a house that was appraised at $500,000 at the time of your father’s death in 2021. This amount becomes your cost basis, even if the original purchase price was $120,000 two decades earlier. If you sell the property three years later for $495,000, you will report a $5,000 loss on your tax return for 2024.
- Alternatively, there are rare situations where the basis is the FMV of the property on the alternate valuation date (six months after the date of death). This approach only applies if the executor of the estate files an estate tax return (Form 706) and elects to use the alternate valuation on that return.
Check with the estate’s executor to verify what basis should be used in your situation and to obtain an accurate FMV for the property.
Entering the sale in the software
Once you have the 1099-S in hand and have determined the basis, you’re ready to report the sale on your tax return. The sale of inherited property is entered by following the menu path: Income < Common Income > Stocks or Investments Sold (1099-B).
1. For the type of investment sold choose “Other” and then Save and Continue.
2. Indicate who owned the investment, choose “One at a time” and then Save and Continue.
3. Mark that you received Form 1099-S and then Save and Continue.
4. Now it’s time to enter the details of the sale. For the investment description, enter a description of the type of home you are selling and the address from Box 3 of your Form 1099-S. Answer “No” to “Did you acquire this investment on a specific date?” and select “Inherited”. Enter the date the property was sold.
Further down the page you will be prompted to enter the sales proceeds and cost basis. It’s important to enter only the portion of the amounts that pertain to you, reflecting your specific circumstances. For instance, even though the 1099-S form may be issued in the name of a single individual, if the property sale involves multiple beneficiaries, each person must report their respective share on their own tax return.
- Using the earlier example, if you and a sibling both inherited the home from your father, then you would each report half of the total amounts on your individual tax returns: a cost basis of $250,000 and a sales price of $247,500, resulting in a net loss of $2,500 for each of you.
Is the FATCA Filing Requirement checked on your 1099-S? If not, answer “No” when asked “Do you have a FATCA filing requirement?” You can leave the “Federal Tax Withheld” box blank if you don’t have any withholding and then Save and Continue.
5. On the following screen, you are asked if you have any adjustments to this investment sale. Most people answer “No.” You should answer “Yes” if you have selling expenses that weren’t already deducted from the sale proceeds reported on your 1099-S. Check the applicable box and then Save and Continue.
This will cause your gain from the sale to be reduced by the amount of any selling expenses you enter. In our example, with selling expenses of $150, the $2,500 loss is further reduced to $2,650.
Tax Form Summary
When you are done, the capital gain or loss will show on line 7 on Form 1040, and Schedule D and Form 8949 will be generated and included with your return.
