Q: I have a situation that seems to be complicated, especially as I try to explain it to my tax and financial advisors. I can’t believe I’m the first one in a situation like this.
My grandfather (my mother’s father), upon being admitted to a convalescent home, put my mother (his daughter) on the deed in joint tenancy with him. He owned the home free and clear at the time. His original purchase price on the home was a mere $15,000.
He has since passed away, leaving my mother as owner of the entire property. A year and a half later after his passing, my mother quit claimed the property to me. I have recently sold the property for $225,000.
I need to know what my cash basis of the house is so that I can determine if I’m selling at a gain or loss. When my mom transferred the home to me a year and a half ago, the fair market value was about $385,000.
I am not sure if I should use the fair market value of the property at the time of my grandfather’s death, or the date the property transferred to me in calculating the cost basis.
Please help, as I am holding up the closing trying to figure out what tax documents to fill out. I appreciate any information you can provide on this situation.
A: Your situation is a bit complicated, but it’s not unfathomable.
When your grandfather added your mother to the deed, he gave her half the house. Her cost basis was whatever he paid for the property (in this case $15,000) plus any structural or capital improvements made. Let’s assume he added another $5,000 to the property while he lived there. The cost basis for her share became $10,000, or half of $20,000.
When he died, the fair market value of the property was $385,000. She inherited his half at $192,500. Remember, she got her half at $10,000.
When she quit claimed the property to you, you received her half at $10,000 basis, and the inherited half at $192,500. (The total value of her gift to you is $202,500, but we’ll come back to that number in a moment.)
You have now sold the property for $225,000. The profit on the share of the house your mother was given is $102,500 ($112,500 – $10,000 = $102,500). The loss on the inherited half is about $80,000 ($192,500 – $112,500 = $80,000). You would subtract half of any costs of sale or cost of improvements that you’ve made to the property from whatever profit you have from your mother’s half.
Unless you lived there for two out of the last five years as your primary residence (as the owner of the property), you would owe long-term federal capital gains tax on the $102,500 plus applicable state tax. At 15 percent, you’d pay $15,375 plus any applicable state tax. Unfortunately, you would not be able to deduct the loss on the inherited half of the home.
But there are also gift tax considerations. Anyone can give away to individuals up to $1 million in a lifetime. You can give away $12,000 in 2008 (rising to $13,000 per person in 2009) to any number of people without deducting from your lifetime gift exemption. But your mother gave you a house, which was roughly valued at $202,500 (her cost basis of $10,000 plus the inherited half’s cost basis at $192,000). She should find out what, if any, forms she needs to file with the IRS.
This is a great example of why someone should leave real estate in their estate to their heirs instead of putting them on the deed. If your mother had inherited the property from her dad, she would have received it at the fair market value the day he died, which you’ve said was $385,000. If your mother had sold the property that same day, she would owe no taxes on it.
Just to be sure I had the details right, I ran your question by two tax professionals, Chet Burgess, an enrolled agent who owns Brookwood Tax Service, in Atlanta; and Julianna Clementi-Ryan, a vice president with Nationwide 1031 Exchange, a 1031 exchange company. They concurred with my answer to you, but you should consult with your own knowledgeable tax professional, because there may be extenuating circumstances or other facts you might have failed to include in your email.
For more information on this topic (and I’ve written about it frequently online), and other similar questions I’ve answered, please visit my website, www.ThinkGlink.com.
Oct. 17, 2008.