Question about selling an inheritance (all disclaimers in place)

Factual Questions
1

All disclaimers in place. I am not going to act until I face-meet with a qualified tax or probate attorney but this is to tide me over until then.

I inherited a house from my mother. It’s not paid for but it has a sizable equity. Because the loan was unassumable I am purchasing it with a mortgage in my name (though I haven’t yet- it’s still in the “Estate of Blanche” name and can remain there for a few more months).

As my mother was not a millionaire there are no taxes on the inheritance itself.

However, I will probably be leaving Montgomery in the next few months. I plan to do some work to the house (nothing major, just cosmetic- painting, new carpeting/flooring, updating the built in appliances) and then I will probably sell it. (I’m assured by a realtor that I can more than recoup what I spend.)

Since I will be going to grad school rather than buying a new house immediately I’d rather invest the proceeds from the sale rather than put them into another house in an area where I probably will not stay more than two years.

Would proceeds from the liquidation of a non-taxable inheritance be taxable? (I know the interest on said proceeds would be, but I’m talking about the principal.) I don’t want to have to pay income or c.g. taxes on this but neither do I wish to buy another home immediately.

I asked the accountant who figured my taxes and she says it should not be, but she stressed that she doesn’t generally work with estates, just personal income tax. The lawyer who’s handling the probate of the estate lives in another city, was going to research the matter but hasn’t gotten back to me and is next to impossible to catch in the hours I have free (besides which, to quote Scott “Dilbert” Adams, he’s “about as useful as a truckload of Chihuahuas anyway”). I intend to meet with a professional but I’ve been superbusy twixt work and other commitments and simply haven’t had the chance yet. I’ve tried looking it up but I’ve found cites that indicate one and cites that indicate the other.

Does anybody know

1- if said inheritance is taxed if sold
2- if so, can I deduct improvements prior to selling
3- if it would be better for me to sell the house while it is still in my mother’s name (which it can remain for up to one year from my mother’s death by local probate law so there’s no rush)
4- the house is in an area that’s not likely to depreciate anytime soon- it’s in a neighborhood surrounded by 50 acres of parks and adjoins the grounds of the Alabama Shakespeare Festival. If I decide to lease instead of sell it when I move and it appreciates, say, $25,000 by then, is that $25k appreciation taxable when I sell?

Thanks for any info and again, I don’t hold you accountable for error. I intend to get clarification of all of these but it will be a few weeks. This is strictly a hail Mary quest for info for my “paper planning” of the next few months.

2

Generally, (subject to the usual disclaimers: I’m not your lawyer, it’s the internet, what I say is probably bunk anyway, consult your own tax professional or astrologer) the tax basis of property of a decedent is stepped up to the fair market value at the date of death (or if the personal representative so elects, to the fair market value at nine months after death). The cost of any improvements done after that would generally increase the basis. On sale, the seller will be responsible for capital gains tax on the difference between what it is sold for and the adjusted basis, except that on a primary residence one may qualify for an exclusion for the first $250,000 ($500,000 for a married couple) of capital gain.

What that means is that if one sells a house soon after death, the taxable capital gain would most likely minimal, just the appreciation from death to the date of sale.

As to whether one should sell the house from the estate or after transfer to the beneficiary, it depends on local laws and practices, so a general message board answer would be unhelpful.

If the property is leased, any appreciation would be subject to capital gains tax, and if any depreciation is taken, the depreciation might be subject to recapture at regular income rates.

Good luck.

3

Wouldn’t this require holding the house for two years? Or is an heir allowed to tack onto the decedent’s period of residence?

I concur with Billdo that the taxes will probably be minimal, but on the question of whether to sell from the estate or take the house and then sell it, you need a local lawyer.

4

The OP’s question is much to complicated to be addressed on a message board. You’ve got to consult an attorney experienced in real estate and probate law. You’d be totally nuts to act on any info. posted here.
Just as an example, the fed. tax exclusion on capital gains only applies to a primary residence.
As an opinion, I don’t think you will recoup your investment on such things as carpet and new appliances, paint, maybe. If the house needs remodeling, most buyers would rather choose their own upgrades. The real estate agent may be agreeing w/ you because they think it will make the property sell faster, or they may just be telling you what, they think, you want to hear.