Inherited a property and remodeled it now its ready to sell

GA · Member since 2023 · 2 posts · 2 votes

I inherited two homes, both were paid off one was livable, and I now live in it, the other was a rental in TERRIBLE condition. When I spoke with a real estate professional, she said the home would probably sell for around $250k in its current condition. I got a HELOC loan on the home for $130k. I used $80k to pay off personal debts and $50k to remodel it by myself with my two hands. I am now working with a realtor and she is saying we could sell it around $380k. What should I be prepared for if I sell? I would love to put my mom into a nicer home in a nicer area would a 1031 exchange make that possible? Im basically looking for advice on how i can save as much on taxes as possible.

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Carini Rochester

Investor · Rochester, NY · Member since 2016 · 576 posts · 358 votes

Since you inherited the house, you get the stepped up basis. The fix-up and increased value will not matter to the IRS as long as you sell within a reasonable time frame of the house passing into the estate. (Reasonable time? a couple of years.) You will, most likely own no taxes.

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Ericka Parrott
Residential Real Estate Agent · Atlanta, GA · Member since 2009 · 381 posts · 134 votes
1y
Hi Dylan, I live here in Atlanta. Yes, do the tax exchange if you can. Take care of your mom. Have your agent start to look for properties that will do the 1031 now.
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Daniel Osman
Accountant · 1031 Exchange Qualified Intermediary | Nationwide · Member since 2024 · 53 posts · 32 votes
1y
Hey Dylan,

The property that you live in and is your primary residence does not qualify for a 1031 exchange. The rental property could though if you structure it correctly.

One thing to consider is that since you inherited the property, your basis is likely the value at the time of inheritance. Even if you take the $250,000 the realtor mentioned it would sell for as your basis that would mean you're looking at an $80k gain: 380,000 - (250,000 + 50,000 improvements) = 80,000
Since you want to buy a nicer home for your mom, a 1031 exchange may not be applicable if the new property is intended for personal use, as 1031 exchanges are for investment or business properties only. However, If the new property for your mom is intended as an investment (e.g., rental property), you could potentially use a 1031 exchange. You'll need to ensure the property is rented to your mother at a fair market rental rate. Charging below-market rent could indicate personal use rather than investment intent.

The IRS safe harbor guidelines suggest holding the property for at least 24 months as a rental to establish it as an investment property. After the 24-month period, you have more flexibility. You could choose to let your mother stay in the property rent-free. However, this could limit your ability to complete a future 1031 exchange with that property.
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Carini Rochester
Investor · Rochester, NY · Member since 2016 · 576 posts · 358 votes
1y
Since you inherited the house, you get the stepped up basis. The fix-up and increased value will not matter to the IRS as long as you sell within a reasonable time frame of the house passing into the estate. (Reasonable time? a couple of years.) You will, most likely own no taxes.
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
1y
@Dylan Gomez, Spot on by @Carini Rochester. Your first determination is what your tax exposure is. You should only be liable for tax on any appreciation since you inherited the rental (minus the cost of your improvements). So there might not be enough gain to need a 1031 exchange.

If there is enough gain to justify the 1031 exchange then simply treat your replacement property as you would any other investment like @Daniel Osman said. Only in this house your mom happens to be the tenant. Charge market rent. Declare market rent on your taxes. And to really take care of your mom use your annual gift limits to gift back to her the rent she pays. So living there ends up costing her nothing. But you are absolutely demonstrating your intent to hold for productive investment use.
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Natalie KolodijBusiness Member
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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
1y
Need a little more information to throw out a few ideas. What is the time frame for everything?

The person you inherited the property from used it as a rental?

When did it stop being a rental?

When did you inherit it?

When was the renovation done?

Did you have an appraisal done at the date of death when you inherited it?

Also to note on that HELOC you took out on the property- with $80k going to personal debts and $50k going to the renovation. The interest being deductible is based on the use. So of the total interest you paid on that HELOC 62% (80k/130k) won't be deductible. Only the interest related to the $50k of renovation use of the loan will be deductible (38%)
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Dylan Gomez
OP
GA · Member since 2023 · 2 posts · 2 votes
1y
@Natalie Kolodij

He used it as a rental.

Stopped being a rental Feb 2023.

Became executor Feb 2023. Deed transferred to my name Sep 2023.

Renovations from Nov 2023 - December 2024.

No appraisal done at death.
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Dan H.Pro Member
Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
1y
Quote from @Carini Rochester:

Since you inherited the house, you get the stepped up basis. The fix-up and increased value will not matter to the IRS as long as you sell within a reasonable time frame of the house passing into the estate. (Reasonable time? a couple of years.) You will, most likely own no taxes.

Have you ever done this or been involved in this? do not answer on a public forum.

I have done it as trustee on 3 properties fairly recently and helped another trustee a couple/few times long ago.

The step up basis is time of death (TOD) value. The safest way to establish this is with a TOD appraisal. All work done to raise value after TOD is not legally in that stepped up basis. There is no 2 year window that current value can establish the TOD value. The step up value is to be determined from the value and condition of the property at TOD.

@Dylan Gomez did you have an estate lawyer help with the estate? Did you get a TOD valuation that would hold up to IRS scrutiny? Please consult your trusted professional in getting accurate information as it relates to the estate.

This site has 1031 intermediaries that have far more expertise than I have about 1031 but 1) you cannot 1031 a pure OO property. In addition, due to the 2 of 5 year rule there often is no need. 2) you cannot 1031 a property that has not been put into service to be an investment property 3) you cannot 1031 a flip. @Dave Foster @bill Exeter

My view is without violating any irs rules your best option may be to live in the property 2 years and use the exemption. Or you can violate various tax rules at your own peril and claim the current rehab was dne prior to TOD. I do not recommend this level of tax fraud as the consequences can be serious.

good luck

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Bill ExeterBusiness Member
1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
1y
Quote from @Dylan Gomez:

I inherited two homes, both were paid off one was livable, and I now live in it, the other was a rental in TERRIBLE condition. When I spoke with a real estate professional, she said the home would probably sell for around $250k in its current condition. I got a HELOC loan on the home for $130k. I used $80k to pay off personal debts and $50k to remodel it by myself with my two hands. I am now working with a realtor and she is saying we could sell it around $380k. What should I be prepared for if I sell? I would love to put my mom into a nicer home in a nicer area would a 1031 exchange make that possible? Im basically looking for advice on how i can save as much on taxes as possible.

Part of the property is your primary residence, which does not qualify for 1031 Exchange treatment. The other part sounds like it was a rehab and now held for sale, which does not qualify for 1031 Exchange treatment. If you have your mom live there without any rental income, it is not considered held for investment but is rather held as a second home and does not qualify for 1031 Exchange treatment. The property that you sell and then purchase through a 1031 Exchange must be held for rental, investment (capital appreciation), or used in a business.
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Bill ExeterBusiness Member
1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
1y
Quote from @Ericka Parrott:

Hi Dylan, I live here in Atlanta. Yes, do the tax exchange if you can. Take care of your mom. Have your agent start to look for properties that will do the 1031 now.

See my comments in recent post. This will not qualify for 1031 Exchange treatment under the present structure and "use."
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Jason MalabuteBusiness Member
Accountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 906 votes
1y
Hey Dylan. If you sell, your cost basis is $250k (inheritance FMV) + $50k (remodel) = $300k. Selling for $380k means an $80k taxable gain at long-term capital gains rates (0%, 15%, or 20%, depending on income).

The $80k HELOC used for personal debts doesn't affect your taxes.

A 1031 exchange could defer taxes, but you’d need to reinvest in another investment property, not a home for your mom. You can identify a replacement property within 45 days and close in 180. Alternatively, yes you could sell, pay taxes on the gain, and use the proceeds to help your mom directly.

Would suggest for you to talk to a CPA and a 1031 specialist to confirm your best move! :)
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Ashish AcharyaBusiness Member
CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
1y
@Dylan Gomez When selling your inherited property, your taxable capital gain will be the difference between the sale price ($380K) and its stepped-up basis (the fair market value at inheritance, likely $250K), minus selling costs (e.g., realtor fees) and documented remodel expenses ($50K). Capital gains are federally taxed at 15-20%, depending on your income, and may also incur state taxes. If you want to defer taxes, a 1031 exchange allows reinvestment into another investment property, but the replacement property must be held for investment purposes. If your goal is to help your mom, you can purchase a property for her through a 1031 exchange and rent it to her at fair market value to meet IRS guidelines. The $80K from the HELOC used for personal debt won't affect taxes but must be repaid upon sale if tied to the property.

To minimize taxes, keep detailed records of your remodel expenses and selling costs to adjust your taxable gain. Additionally, timing the sale in a lower-income year or exploring potential deductions could further reduce your tax liability. Consult a CPA to ensure compliance with tax regulations and explore strategies that align with your goals, such as providing for your mom while managing tax implications effectively.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.
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