USA Inherited house, bought from estate-paid off loan, 2 months later sold, do we lose Stepped-up basis?

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Background: Inherited house, tried to sell, eight months later bought from estate and paid off reverse mortgage, 2 months later was able to sell. Do we lose Stepped up basis? Both we and the inherited home are in Florida. We've read many other posts, so we have tried to give you all details so the question can be answered accurately.

My husband's father passed away January 2014, and he and his stepbrother inherited a small 1950 block home. An appraisal was done 2 weeks after the death, and it came in at $65,000, but there was a reverse mortgage of $57,000 that would have to be paid off, so there was very little value. The stepbrother just wanted to give it back to the bank, and not have anything to do with it. We wanted to try to sell the home for possibly $70,000 just so they would get a little bit of inheritance. We worked closely with the reverse mortgage company while we were trying sell, and kept them involved with every potential buyer, but no success. After six months of maintaining AC, water, electric, lawn, etc., and showing the house (no one ever lived in it), the market kept going down. After rereading the reverse mortgage documents, we saw that another appraisal could be requested if we felt the value was now lower than the payoff. The August 2014 appraisal came in at $45,000, so we decided we would purchase it ourselves from the estate with the stepbrother's approval, and try to sell ourselves later when the market improved. The plan was to rent it out in the interim.

We paid for a full inspection to make sure everything was safe and up to code, etc. before we committed. There were just some non-code electrical outlets that needed to be replaced for $450 and gas hot water heater inspection and water leak repair for $200. Thankfully that is what his parents used their reverse mortgage to do in 2007. They upgraded electrical to 200 amps, new windows, new roof, etc. We submitted a contract for 95% of the appraised value, per the reverse mortgage documents. The reverse mortgage company accepted our $42,750 payoff offer. We were able to use our home equity loan funds for the payoff. My husband was the court appointed representative of the estate. Our lawyer drew up a Purchase and Sale agreement, and recorded both sale approvals from the stepbrother and the Court. In October 2014 we had the closing, my husband was the seller representative of the estate, and he and I were the purchasers.

Now that the property was ours, we worked hard getting it ready to rent. Some close neighbors, that were renting down the road, didn't want to rent anymore and wanted to actually put in an offer to buy, but could not get bank financing. They asked if we would hold the mortgage. We accepted a $68,000 offer, $4,000 down on a $64,000 5 year balloon loan. We closed in December 2014.

Our understanding about the "stepped-up basis" for inherited property would be: If he had been able to sell the property six months earlier for $68,000 to someone else, the long term capital gains would have only been $3,000, the difference of $68,000 and $65,000.

NOW after all that detailed background, here is our 2014 tax questions:

Even though my husband inherited the house, did our purchasing it from the estate negate the stepped up basis opportunity or not?

If yes, would our capital gains now be the difference between the $42,750 (the purchase price which was our payoff of the reverse mortgage on in the inherited property), and the $68,000 from our sale to the couple? If yes, unlike the stepped up basis, could we deduct the selling preparation costs like: the repairs, electrical code upgrades, lawyer fees, monthly maintenance costs, utilities, insurance, etc.? If yes, are these costs (that were all paid by us) deductible while it was in the estate, or only the two months it was in our names?
 

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