Lombard, IL asked in Tax Law for Illinois

Q: If I receive money from sale of parent's home after their death, can I claim it on next years taxes

I will receive a check today from the sale of my father's home, he died in April. If I don't cash it until 2019, do I still need to claim it on 2018 taxes?

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1 Lawyer Answer
Jon Dowat
Jon Dowat
  • Tax Law Lawyer
  • Naperville, IL
  • Licensed in Illinois

A: Your are dealing with about three issues here and it is not that simple. First, income should be reported in the year it was received. Even if you do not cash the check the IRS treats it as if you received it, that is called "constructive receipt," which means we will pretend you received it so we can tax it.

Second, if the proceeds of the sale of the home are paid to you the lender or title company will issue a Form 1099-S to you and they will send a copy to the IRS. Even if the IRS does not "catch" you on the constructive receipt rule, the IRS will know that you received the money because of the form 1099-S. The IRS considers the profit you receive from selling a home as "taxable gain." Cashing the check next year does not stop the 1099-S from being sent to the IRS.

Third, there is some good news. If you inherit your father's home and you sell it there will be no gain. To understand see the tax lesson below.

TAX LESSON: (READ THIS FIRST BEFORE CONTINUING). If one buys a home for $350,000 that is the basis. If the home has been upgraded, for instance an addition was added that cost $30,000 the the new basis is $380,000. Say the home is sold ten years later for $450,000 here is how one calculates the basis. $350K (purchase price) + $30K= $380K(new basis).

Here is how the tax is calculated (be patient we are getting to the good news):

$450K (sales price) minus $380K (basis) = $70K (taxable gain).

Now stick with me here is the good news. If the above scenario applied to your dad when he sold his house he would have to pay tax on $70K taxable gain. READY, the good news is that you when you inherited the home you receive a "step up in basis." This means that the basis of your dad's home the at the moment you inherited the basis of the home was "stepped up" to the current market value or essentially the proceeds of the sale. So, you inherited the home at the sales price. Given that the proceeds of the sale are the same as the basis there is no gain, ergo... no tax.

To review: If your dad sells the home the sales price minus the basis will be a taxable gain.

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