Madeline Valente, CFP®, a wealth advisor in BlueSky’s Pleasanton, California office answers this common question.
First, I am sorry for the loss of your father. If your dad was the sole owner of the house at the time of his death, the property would have received a full step-up in cost basis to its fair market value on the date of his death. This amount then becomes the cost basis of the home for you, as you are the new owner by inheritance.
The executor of your father’s estate would have been required to provide you with a statement listing the fair market value of the home on the date of your father’s death. If you didn’t receive this document or can’t locate it, it may be worth a try to contact the executor and ask about the cost basis.
Any gain in the value of the home from the date of inheritance to the date that you sell it would be considered capital gains. If you have done any capital improvements to the home since you inherited it (things like remodeling a bathroom or kitchen, adding a pool, installing central air), you can add the cost of these improvements to your cost basis. Unfortunately, projects like painting or other types of maintenance and repair do not count as capital improvements.
As a simplified example, if your dad bought the house 35 years ago for $50,000 and the property was worth $280,000 on his date of death, your cost basis would be $280,000 (assuming he was the sole owner and you were the sole inheritor). If you spent $10,000 to remodel a bathroom after you became the owner, your new cost basis would be $290,000. If you then sold the home for $310,000 (ignoring any selling costs) you would have a capital gain of $20,000 ($310,000 selling price and $290,000 cost basis).
Depending upon how long you’ve owned the home as your primary residence at that point, you may also then be eligible to use your $250,000 home sale tax exclusion (the first $250,000 of capital gains would not be taxed).