Inherited property damaged in a fire

[taxladyworking]

A client inherited property from her deceased father that had been severely damaged from a fire. The insurance company paid to rebuild the house. What would be the basis of the property to her? Since there was no attorney involved to provide a valuation, can I use the property tax statements RMV for the land and then add to the basis the cost that the insurance company paid to rebuild it? She also paid from her own pocket  the cost of removing the burned debris as well as new landscaping. She sold the property in 2020 once it was finished. My thoughts are that she can count the lands RMV as stated on the property tax statement and add the cost of the rebuild plus the landscaping and debris removal, but want to make sure my thinking is correct. Any advise or suggestions is appreciated.

[Just-Lisa-Now-]

FMV at date of death, insurance company should have done an appraisal, no? Property tax statement doesn't mean anything.

[BobKamman]

Why would the insurance company have done an appraisal?  That's like saying an attorney should do an appraisal.  (OK, the original post says that.)  

It's not clear whether the fire happened before, during or after the father's death.  I would say the FMV at date of death was the value of the restored property once the insurance company finished its work, and if it sold shortly thereafter, then there is no gain or loss except for selling expenses.  Maybe throw in the landscaping she paid for.  Not the trash hauling, that's an estate expense.  It's more difficult to make this case if the fire happened after death, but why not?  The FMV of an insured property includes potential insurance compensation.  

In some counties and parishes, the tax assessment is helpful if it can be used to compare the property to others that recently sold.  But then, how long did this restoration work take?  When property values are increasing at a 20% annual rate in some places, there might be some gain before selling expenses.  Unless this was a million-dollar home and the taxpayer has a million dollars of income, I wouldn't lose much sleep over it.  

[taxladyworking]

The father passed away a few days after the fire happened which was January of 2019. The insurance company had the home rebuilt by June of 2019. The daughter finished the landscaping during the Summer months in 2019 and then sold it in January of 2020. This was also not a high dollar home. The debris that was removed from the property was the burnt remains of the house and garage which was a considerable amount. The RMV on the property tax statement is in line with the price that land is selling for in the area so that is why we were going to use it to value the land. It seems that adding the restored value/cost of the rebuild would be more reflective of what she would of inherited if it had not burnt down. The home was a newer home and the insurance company pretty much put it back to what it was before the fire which was at a cost of $160,477. If I use the $80,000 for the RMV of the land and add the $160,477 for the rebuild and the landscaping at $14,000 plus closing cost of $17,535, I have a total inherited basis of $272,012. The home sold for $310,000 so she would reflect a gain of $37,988. Does that sound right?

[BobKamman]

No, it doesn't sound right.  People don't pay tax on inherited houses.  You should focus on the story, not the numbers, especially since this is all pre-Covid.  The value of the land is irrelevant.  She inherited a property that was worth $310,000 once the insurance work was completed.  Or maybe it was worth $300,000 and the landscaping added $10,000 value for her $14,000 cost.  If she doesn't need a capital loss and you're worried about how it looks, say it was worth $290,000 in January 2019, and allow for 5% appreciation.  Then add the $14,000 landscaping.