Q: My sister and I inherited my father’s house when he died in November of 2002.

In the estate accounting, it showed the house was worth $41,900. In order to facilitate the closing of the estate, I bought out my sister’s 1/2 share of the house for $23,000.

I let my cousin stay in the house rent free because he had lost his job. In May 2006, I sold the house to that same cousin for the amount of $46,000, two times the amount I had given my sister for her share of the house.

Do I owe capital gains on the sale of the house? I read in another one of your columns that no gains are reportable for estates up to $2 million. My father’s estate was valued at around $64,000, including the house. Do I have to show this sale on Schedule D of my tax returns?

A: Unfortunately, the issue you’re dealing with isn’t inheritance taxes. This is an issue about capital appreciation on investment property.

When you inherited your share of the property, the whole property was worth nearly $42,000. Your share of that would be about $21,000, which was the cost basis for your share of the property. When you paid $23,000 for your sister’s half of the property, you brought the cost basis up to $44,000. When you sold the property for $46,000, you technically earned a $2,000 profit on the sale of the property.

From that amount, you’d subtract any costs of sale, such as a commission, fees, or any structural improvements you made to the property in order to sell it. My guess is that you don’t really have a profit on the property, but if you did, you’d pay only capital gains tax of up to 15 percent on the $2,000 plus state tax.

And, yes, there is an exclusion of $2,000,000 on estate taxes and your father’s estate would not have paid any tax on his estate. So if a person dies with an estate of less than $2,000,000 no tax is owed to the federal government. However, once property from that estate is passed on to other people, those people might have to pay tax when they sell the property they inherited.

For more details, consult with a tax preparer or accountant.

Dec. 29, 2007.