Home Acquired by Gift, Inheritance, Etc.

If you received the home (or the part you did not already own) as part of a settlement in a divorce, you generally have no gain or loss at the time of the transfer. Thereafter you will essentially "stand in the shoes" of your former spouse and take whatever basis he or she had in the property, as to the part you received in the settlement. If the home was originally purchased by you and your former spouse together, the basis of the home will generally be figured based on its cost.

If you received your home by bequest or inheritance before 2010 or after 2010, your initial basis is the fair market value of the home on the date of the former owner's death, or the alternate valuation date if the estate is using that date for estate tax purposes. If an estate tax return was filed, use the amount shown for the home on the tax return. If the estate was too small to require the filing of an estate tax return, you may need to get an appraisal showing the home's value as of the date of death. Special rules apply in community property states, where the death of one spouse causes the home to pass to the other spouse. Consult your attorney or tax professional for more details.

For 2010, the "stepped-up" basis rules were replaced with carryover basis rules, unless the estate elected to pay estate tax in exchange for a stepped up basis. This means that if you acquire property from a person who died in 2010, your basis in the property will be the lesser of the decedent's adjusted basis or the fair market value of the property, unless an election is made. So, if you inherited the home that your parents bought for $24,000 in 1956 with a current fair market value of $750,000 in 2010, your basis would be $24,000. Fortunately, there was some relief provided: executors could increase the basis of estate property by up to $1.3 million. This amount is increased by an additional $3 million (up to $4.3 million) in the case of property passing to a surviving spouse. Also, the estate can elect to have stepped-up basis apply and compute estate tax under the post-2010 tax regime.

Warning Consult a tax attorney if you inherited a home in 2010, as there are a number of complex elections involved.

If you received the home as a gift, your initial tax basis will generally be the same as that of the person who gave it to you. You can add to this basis the part of any federal gift tax paid by the donor that is attributable to the increase in the home's value. See IRS Publication 551, Basis of Assets, or your tax adviser for more details.

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