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My mother-in-law with dementia spent all of 2012 living in assisted-living facilities after receiving her dementia diagnosis in November 2011. My wife had POA and control over her mom's affairs and we live nearby. MIL's house sat empty all throughout 2012 while we slowly cleaned it out and prepped it for sale. All of MIL's mail was forwarded to our house; she receives no mail at her assisted-living residence. So, how do we handle the issue of her house on her 2012 taxes? She technically owned the house all year, we kept her up to date on the property taxes, insurance, etc., but she did not physically live in the house at all in 2012. The assisted-living facility where she lives now is in the same city as her house, only about a maile and a half away. So, how do we handle issues on her taxes this year related to where she lived?

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I don't see where there is an income tax issue here unless there is a mortgage interest deduction you feel she may not be entitled to because she was not living there. Otherwise, the only other tax related issue in this scenario would be property tax exemption(s).
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Why is she even filing taxes?

About the house, you might want to keep it as mom's homestead and therefore pay lower property taxes and other perks on senior property ownership. It could be on the market for a while and $$ is $$. If you do that, have mom do an "intent to return" letter from her that you just file somewhere safe, to establish that she wanted that done. May never be an issue but you never know.
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@igloo572: She must file taxes as she has some investments that generate a fair amount of taxable interest income, as well as getting her deceased husband's pension. Also, now that she is living in an ALF, her deductible medical expenditures went way up in 2012. We sold her house in January 2013 (handled by my wife because she has POA and is trustee of her mom's trust, and due to MIL's dementia she is unable to sign for herself anymore). MIL will never be cleared by any doctor to live alone anymore, and it made no sense to drain MIL's finances to keep up and insure a house that she would never use again.

@Ralph Robbins: you are correct, my question was for handling the property tax exemption section of her state return. I use TurboTax, and I don't know how to answer the questions about where she lived in 2012 and the number of days she lived in her "old (sold) home" vs. "new (bought) home." She didn't live in the old house at all in 2012, and there isn't any "new" home unless you can list an ALF as a homestead. When I enter "0" for the number of days she lived in her "old" house in 2012, her $400 refund turns into a $300 payment owed, presumably because she loses the property tax credit. The house was sold in January 2013. So I know we'll have to file a 2013 return for her to account for the sale of the house.
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