Q: My husband “inherited” a house last November when his mother passed away.
Several years ago, his mother put him on title to the house so that when she became incapacitated or passed away he would automatically get the house through right of survivorship.
His mother’s plan was for he and his sister to either keep the house, if one of them needs it to live in, or sell it and split the proceeds 50/50. If my husband sells the house and gives 50 percent of the proceeds to his sister, is he personally liable for capital gains based on the total sales price (since he is now the sole owner)? Or, is there some way to divide up the liability?
A: If your mother-in-law put your husband on the title to the house, then he received a half-ownership in the property at that time. He received the property at his mother’s cost basis. When she died, he either received the other half (if they were joint tenants with rights of survivorship), or half of her half (the other quarter going to his sister, if that was the disposition according to the will).
Let’s assume that he owns it all at the moment. If his mother bought the property for $100,000, when she put him on title, he received his half at that price point. If the property was worth $300,000 the day she died, he received the other half at that stepped up basis — at that value.
If he sells the property for $300,000, he would owe long-term capital gains tax on his original half of up to 15 percent plus state tax. He’d owe nothing on the half he inherited from his mom. (Now you see why it’s so much better to inherit rather than give someone real estate.)
Unfortunately, there is no way to divide the liability, other than simply paying the tax from the proceeds of the sale and giving his sister a little less than half.
If your husband wasn’t a nice person, he could easily exclude his sister from any share in his mother’s estate (although his mother didn’t want this, but that’s the way she set up her estate).
The only way around any tax liability is if you and your husband move into the property as your primary residence for two years. Then, any profits you receive up to $500,000 on the sale of the property will be yours to keep tax-free.
You should sit down with an accountant to discuss what has happened and what options you have to help follow-through on your mother-in-law’s wishes.