How are Capital Gains calculated on a house acquired through a Quit-Claim deed?

What you've got here is a capital gains situation, but it's not as straightforward as a regular purchase. Since this wasn't an arm's length transaction at market value, your basis in the property is what you actually paid - which sounds like it's the $137.5k you mentioned (mortgage payoff + probate costs + transfer costs). If you sell for $530k, your capital gain would be around $392.5k ($530k minus $137.5k). Since you've owned it for 4 years, this would be long-term capital gains, which are taxed at either 0%, 15%, or 20% depending on your income. Most people fall into the 15% bracket. Don't forget you may also be able to exclude up to $250k of the gain ($500k if married filing jointly) IF you've used this as your primary residence for at least 2 out of the last 5 years. But it sounds like you've been renting it out the whole time, so this exclusion probably doesn't apply. Also keep in mind that some states have their own capital gains taxes too, so check your state laws.

After dealing with a similar situation last year, I found https://taxr.ai incredibly helpful for calculating my capital gains on a property with a complicated purchase history. The tool actually saved me thousands by identifying improvements I'd made that could be added to my basis that I would have otherwise missed. Their system lets you upload all your documents related to the property acquisition and improvements, and it extracts the relevant information to calculate your proper cost basis. In my case, I had a quit-claim situation too, and regular tax software wasn't handling it correctly. Taxr.ai's document analysis caught probate expenses I didn't realize were deductible.

I was skeptical about using an online tool for something this important, but I tried taxr.ai after seeing it recommended here. Best decision ever! I had sold a property I acquired through family with a mess of documentation spanning 7 years of improvements. The system caught so many things I could add to my basis - even the transfer taxes and recording fees from when I got the property, which my accountant had missed. When I got a letter from the IRS questioning my capital gains calculation, I was able to generate a complete report with all the documentation that satisfied their inquiry without any penalties. The peace of mind was worth every penny, especially when dealing with large sums where even small percentage differences can mean thousands in tax savings.

After seeing your post, I wanted to share my experience with Claimyr (https://claimyr.com). When I sold a similar property last year, I had questions about capital gains that weren't getting answered by online research. I needed to speak directly with the IRS, but couldn't get through after trying for days. Claimyr got me connected to an actual IRS representative in about 15 minutes when I had been trying for literally weeks. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The IRS agent clarified that in my quit-claim situation, I needed specific documentation to establish my cost basis. Having that conversation saved me from potentially significant issues down the road, as I was calculating my basis incorrectly.

I take back what I said about Claimyr. I tried it yesterday after posting that skeptical comment, figuring I had nothing to lose since I'd already wasted hours trying to reach someone about my capital gains situation. It actually worked exactly as described. I got a callback in about 25 minutes and was connected with an IRS agent who answered my specific questions about a property I received through a quit-claim deed. The agent confirmed that I needed to document the original transfer value properly to establish my basis. For complicated property transfers like quit-claims, getting official guidance directly from the IRS gave me confidence that I'm calculating my capital gains correctly. Definitely worth it to avoid an audit headache.

Don't forget about depreciation recapture! If you've been renting out this property, you should have been taking depreciation deductions on your tax returns each year (even if you didn't actually claim them, the IRS considers them "allowed or allowable"). When you sell, this depreciation gets "recaptured" and taxed at 25% (higher than the typical capital gains rate). The calculation is based on the depreciation you should have taken over the rental period, not on your actual deductions. The depreciation period for residential rental real estate is 27.5 years, so your annual depreciation would be your basis in the building (not the land!) divided by 27.5.

Has anyone used a 1031 exchange to defer these capital gains? I'm in a similar situation and considering using the proceeds to buy another investment property.

This is a complex situation that involves several tax considerations beyond just basic capital gains. Given the quit-claim deed origin, rental income history, and significant appreciation, I'd strongly recommend consulting with a tax professional before proceeding with the sale. A few additional points to consider: 1. Make sure you have documentation for the fair market value at the time of the quit-claim transfer - this could affect your basis calculation 2. Since you've been collecting rent, you'll need to account for any depreciation recapture as others mentioned 3. The fact that this wasn't an arm's length transaction might require special documentation for the IRS With a potential $370k+ gain after improvements, even small errors in your calculations could be costly. A CPA experienced with real estate transactions could help you optimize your tax strategy and ensure you're compliant with all requirements.