Q: In 1997, my father died and left my mom their house. She “sold” the house to my brother and sister for $1. The deed is in my brother’s and sister’s names.My brother now wants to add me onto the title. Do they have to pay capital gains taxes for the transaction?
A: I don’t think your Mom did her kids any favors when she sold them the house for $1. I don’t know what the value of the home actually is, but it could trigger massive capital gains taxes when you decide to sell the house.
That’s because the cost basis of the property is now $1 for tax purposes. If your mom has simply willed you three the property after she died, it would have been included in her estate. If she dies in 2004 or 2005, she could have passed down up to $1.5 million in her estate tax free.
When you inherited the property, the cost basis would have been its market value on the day she died. So if the house was worth $300,000 the day she died and you and your siblings turned around and sold it on that day, you would owe no taxes and would have been able to keep your share tax free.
But because your mother sold you the property for $1, if you sell the property now for $300,000, you will owe capital gains tax of 15 percent on the profits, which in this example would be $299,999 minus any broker’s commission you pay and other costs of sale.
Assuming there are no costs, the tax you’d owe would be around $15,000 for each of the three siblings. That’s cash that could have been in your pocket if your mother had held onto ownership the property. If one of your siblings has used the home as her primary residence for two of the last five years, she will be able to exclude $250,000 of any gain from taxes or if she is married, she won’t have to pay taxes on the first $500,000 of profit on her share of the sale of the home.
Many parents think they’re helping their children by selling them the house for next to nothing, or even just gifting the property. But unless this is done right, you could be facing a tax nightmare someday.
Before you complicate this any further by getting added to the deed, you and your siblings may wish to speak to your tax preparer or accountant about how you can fix this potential tax problem.
For more details, and perhaps a few ideas on how to fix this situation, see your accountant or tax preparer.
Please do not follow this article to a T. If the mother sold the house for 1$ and considered the rest a gift then they would assume a cost basis of what the gift and 1$ are worth (the fair market value on day of transaction. Most likely this would be the case because selling property to related parties for an amount well under the market value would trigger it to be assumed a gift for the difference.
Mark, the value of the property when gifted is what the property cost when it was bought by the gifter.