Q: I read one of your recent articles about the 48-year old lake property that was transferred to a family member via quit claim deed. I have a similar situation with a waterfront house that my mother currently owns. I have in the past been warned about the capital gains taxes that would have to be paid if the deed was changed.
I was told that since my mother is not a permanent resident of the property, that the federal exclusion of $250,000 would not apply.
Should we consider gifting the property in this situation rather than a sale to family members? (I understand we’d be keeping the value at the original purchase price.)
We were also warned that if Mom needs additional money for medical expenses after a deed transfer, the government could use the look back rule for a number of years to recoup an asset that could be collected from.
Mom will be 102 in July and we’d like to find a resolution that would keep the property in the family rather than losing it to the government or taxes.
A: Happy birthday to your mom! That’s quite an accomplishment and you have been fortunate to have her in your life for so many years.
If your mom purchased her waterfront property many years ago, you probably have a situation in which you could find yourself paying quite a bit of taxes if you sell the home. You need to figure out how much profit your mom really has on the home.
Let’s deal with the sale of the home first. Since the waterfront property isn’t your mom’s principal residence, she will likely have to pay capital gains taxes on the profit from the sale of the home. Keep in mind, however, that she would only have to pay taxes on these profits. (If the home were her primary residence, she could exclude from federal income tax $250,000 on the sale of the home.)
If she made capital improvements to the home over the years, including additions to the home, a new roof, or a new boat house or dock, all of those improvements reduce the amount of her profit and the amount she might pay in taxes.
The good news is that the capital gains tax rate is rather low and, depending on her income level, she might only pay 15 percent in taxes. That means if you find out that she has a $100,000 in profit that is subject to taxes, she might only have to pay $15,000 in taxes. And that’s better than having to pay at a rate of up to 35 percent for income taxes.
Now, if she sells or even transfers the home by quit claim deed or by other means and your mom is in need of medical care in the near future that she can’t pay for, she would be obligated to first spend her money before Medicaid would pay for her long term care expenses. If she got rid of all of her assets, Medicaid could look back up to five years to see what assets she had, who received them and attempt to get the value back for those assets.
Medicaid won’t go after assets sold and if they are sold at market value and the seller received the cash from that sale. But Medicaid will look to that cash for payment of Medicaid services. If your mom transfers all or part of the property by gift, Medicaid can still go after the gift portion given for reimbursement during the look back period. In some cases that look back period is five years.
There are some minor exceptions to this rule. Of course a mother or grandmother can give gifts to her children and grandchildren, but any disposition of the home in the entirety would certainly raise scrutiny later on.
You may want to talk to an estate planner once you determine the value of the home and the profit your mom might get out of it. If there is little profit and not much cash that you she will receive from the sale, you might not want her to do anything other than sell the home and keep the little cash she can get out of it.
If there is quite a bit of profit from the sale and your mom would get quite a bit of cash out of the sale of the home, the estate planner might be able to help you decide how to deal with the home without running into legal roadblocks with the federal Medicaid rules and even your own state’s rules.
While you might not be able to shelter all of the money from Medicaid, you might be able to shelter some of it from tax and payment to Medicaid.
One last item, some states have a significant tax on the sale of real estate and if your state has such a tax, you might want to see what effect the sale of the home would have not only from the federal tax perspective but also from your state tax law perspective.