Q: My mother built a house in 1960 for about $12,000. She used a quit claim deed to gift the property to my two siblings and me. But now she needs to go into a nursing home and we need to sell the house to pay for her care.
We were told that because we own the property and don’t live there, that we will have a large tax bill on our hands.
Could the house be gifted back to my mother for her to sell? It would still count as her primary residence, I think, since she only moved into the nursing home in March 2007. She would have lived in her house the requisite two of the past five years.
If she were to sell it then, she could accrue all gain tax free and we would be free of tax burden. It might play havoc with Medicaid if she is eventually forced into public care, since $200,000 doesn’t go far in those places. But I doubt she would outlive the money, and we could inherit any remainder and just pay estate tax.
Sometimes I think we little people without many assets have bigger headaches with them than the multi-millionaires.
A: The problem with doing estate planning on the fly, without the benefit of a professional estate planner or estate attorney, is that sometimes you don’t think about the long-term consequences and what might happen if something bad occurs.
Rarely is death the worst thing that can happen to someone who is a senior and has lived an active and good life. What terrifies the many seniors I’ve spoken with is the idea of dying slowly, painfully, and expensively in a place that isn’t your own. That’s why financial planners recommend that people in their 50s buy long-term care insurance. Of course, that option isn’t available to your mom at this point in her life.
You and she have limited options at this point. You and your siblings can gift the house back to your mother, but I don’t know if she would qualify to keep up to $250,000 in profits tax-free.
The question is, when did she gift the property to you? Even though she has lived in the house for a long time, she actually would have to own the property and live there as her primary residence for two of the past five years in order for the IRS rule to work. If she gave you the house over four years ago, you may be out of luck.
One thing to keep in mind is that if you can’t transfer back the property to your mom but instead you have to sell the property and pay taxes, your tax bill this year will be approximately 15 percent of the profits from the sale of the home plus any state taxes owed.
How can you reduce that amount? While your mom may have built the home for $12,000, she may have made capital improvements (including any structural improvements, replacement of the roof, additions, etc.) to the home over the years and you might have made your own improvements to the home. All of these capital improvements would reduce the amount you might have to pay in taxes when you sell the home. You may also deduct from the sales price the cost of selling the home (including the agent’s commission) and the cost of purchase.
If your mom built the home for $12,000 and she invested $50,000 in capital improvements to the home over the years and you have $13,000 in closing costs to sell the home, your tax bill might be less than you otherwise might think. If you were to sell the home for $150,000, the capital improvements and closing costs would increase the basis for the home up to $75,000. You would have to pay capital gains taxes on the difference of $75,000. At a 15 percent capital gains tax rate, you could expect to pay about $11,250 in capital gains taxes, plus any state taxes owed. Depending on your circumstances, the rate might even be less as you and your two siblings split up the gain.
But now it’s time to bring in the professionals. Please contact an estate attorney immediately for a discussion with him or her to determine your options.
Sept. 11, 2008.