Q: My mother-in-law was left property after her husband’s death in 1997. We sold the property last week.
The proceeds were divided 3 ways: one-third to my mother-in-law, and one-third each to my husband and his sister.
What would be the best way to handle the capital gains tax on the money? My accountant estimates we’ll pay 21 percent. Is there a way to lower this percentage?
A: I’m confused about who actually owns the property. If your mother-in-law owned the property, then she would pay capital gains tax on the difference between the value of the property the day she inherited and the value of the property on the day she sold it.
For example, if the property was worth $100,000 on the day her husband died, she inherited the property tax-free from his estate. If it was worth $200,000 the day it was sold, she would pay long-term capital gains tax up to 15 percent on the difference.
But if your husband and his sister didn’t own the property, they shouldn’t be involved just yet.
Your mother-in-law has the ability to give tax-free gifts to her children, friends or relatives of up to $11,000 each per calendar year. If she gives you, your husband and each of your two children $11,000 each, that’s a tax-free gift of $44,000. She can give that in each calendar year and you would owe no tax on that gift. She can do the same with his sister and her family.
In this way, the only tax that would be paid would be her own long-term capital gains taxes owed on the sale of the property.
As for what your accountant says, I have no way of knowing on what he is basing his numbers. But I suggest you go back and see if there isn’t a smarter way of distributing the proceeds from this sale.
A little bit of planning may save everyone a lot of money when tax season comes around.
Published: Jan 21, 2005