Q: I read your answer to someone whose mother wanted to use a quit claim deed to transfer ownership of her home to four children. My situation is similar, but my question is about the tax consequences for the four owners.
My mother, several years back, began quitclaiming her house to her four children. She did this in several chunks, to avoid any gift tax problems, I imagine. She didn’t tell any of us that she did this until much later.
She retained lifetime residency rights, but circumstances have forced her into assisted living. It’s not a nursing home, so the Medicaid look back period is not a consideration yet.
We wish to sell the house and use the proceeds to keep her in assisted living. Will we have to pay taxes on the appreciated value, and think that might be complicated as we received our ownership in several (presumably differently valued) chunks during the process?
A: Here’s how it works: when your mother transferred ownership to you, you received the property at her cost basis. So, it doesn’t matter if she did this all at once, or over a bunch of years. If she paid $30,000 for the property, then your cost basis is $30,000.
That is to say if she gave you 10 percent of the home at one time, your basis would have been $3,000 for that 10 percent share. If over time, your mother gave all of you the whole home, you could say that your basis for the home would be $30,000. While I have simplified the computation of what your basis would be, you can get an idea of what you’ll have to pay if you sell the property.
When computing your mom’s basis for the home, you would include the cost of the home itself and whatever capital improvements your mom made to the home over the years: new windows, a new garage, a new roof, and even a new bathroom. If the property sells for $200,000, then your profit is the sales price minus the cost basis, minus the cost of any structural improvement to the property, minus any costs of sale.
Because you own the property and not your mother, and neither you nor your siblings lives there as their primary residences, none of you are entitled to keep any portion of the proceeds tax free. The sale of the asset would be considered long-term, so you would owe long-term capital gains tax of 15 percent, plus any state taxes owed.
Let’s assume the property does sell for $200,000, and the cost basis is $30,000, and with costs of sale and other structural improvements, the profit is about $150,000. That profit is divided by four, or $37,500 for each sibling. Each sibling would pay about 15 percent capital gains tax plus any state taxes owed on that money. You could use the proceeds after that to pay for the care your mother needs.
I know you said that Medicaid is not an issue at the moment, particularly if your mother completed the transfer of the home to you and your siblings longer ago than five years. But since the Medicaid look back period is five years, if your mother transferred the property to you within the last five years, Medicaid could force you to unwind all or a portion of the transfers to all of you to use the money from the home to pay for your mom’s expenses.
On the other hand, the way your mom planned the transfer of her home, you and your siblings will now have to pay tax on the profits from the sale of the home.
Please consult with an accountant or estate attorney to make sure that you have the necessary paperwork (a power of attorney would be helpful for financial matters and health matters at this point) in order, and to see if there are any other ways to assist your mother financially at this point.