Q: My mom added my sister and me to her paperwork as equal owners of her home back in 1999. We sold her home this past January (as mom is permanently in a nursing home now) and each got $27,404.94.
I bought a brand new condo back in February and used my portion as a down payment, thinking if I did that, I wouldn’t have to pay capital gains tax on the amount. Now, a lawyer my sister and I see regarding mom being in the nursing home says I will have to pay capital gains taxes on it.
Is there any way you can tell me approximately how much this tax will be so I can try to plan ahead for it? Any help would be greatly appreciated. Also, my sister thinks just because she doesn’t work and is on permanent medical disability, she won’t have to pay the capital gains tax on her share. That’s incorrect, isn’t it?
A: You bought your property thinking that the rollover replacement rule (which allowed owners to defer taxes, not escape them, by buying another property for equal or greater value) was still in force. This rule changed several years ago.
Current tax law permits sellers to keep up to $250,000 in profits each (up to $500,000 if you’re married) tax free as long as the house is your primary residence and you have lived there for at least 2 of the past five years.
Unfortunately, unless you lived in the home as your primary resident for two of the past five years (up until you sold the property), you will likely owe a 15 percent tax (the rate on capital gains) on the gains you made on the sale of the home. Your rate may be less depending on your income bracket. On $27,000, this would come to around $4,000. This assumes that you were an owner for at least 1 year. If you owned the property for less time than that, then you may owe more in tax.
Your sister may benefit from other provisions of the tax code due to her disability and depending on these benefits; the amount she would owe may differ from yours.
There are other issues as well. By making you an owner before she died, your mother gave you what appears to be an expensive gift and she may have to pay certain taxes due to this gift. You should really talk to a professional tax advisor on these issues as soon as possible.
Of course, this could have played out in a way where you wouldn’t have owed tax. If your mother had waited to leave you the house in her will, you would have inherited it at its stepped up basis (what it was worth the day she died) and when the house sold, you would have inherited the proceeds tax free, assuming she left less than $1.5 million in her estate.
It’s hindsight, as far as you’re concerned. But please talk to your accountant or tax preparer about your current tax liability.
Sept. 23, 2004.