Howdy,
A recent conversation with another..........and I'll add what I am aware of regarding this point of curiosity.
---2 adult children were already legally assigned their mother's house via a quit claim deed about 10 years ago
---mother passed a several months ago
---the house was sold within 2 months
For all practical purposes, the value of the house had not changed during this time period.
The house value at death was $100,000 and was sold for $100,000.
Are either of the children required to generate forms, and/or have to claim any type of capital gain to the IRS about this sale of inherited property of this circumstance? Or, I suppose; be required to report the transaction at all. The overall value of the estate is less than $200,000.
I have not yet taken any time to research this issue on the net.
Thank you in advance for your thoughts and guidance.
Regards,
Catch
Comments
If you have a gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income. You may qualify to exclude up to $500,000 of that gain if you file a joint return with your spouse. Publication 523, Selling Your Home, provides rules and worksheets. Topic 409 covers general capital gain and loss information.
In general, to qualify for the exclusion, you must meet both the ownership test and the use test. You are eligible for the exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale. You can meet the ownership and use tests during different 2-year periods. However, you must meet both tests during the 5-year period ending on the date of the sale. Generally, you are not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home. Refer to Publication 523 for the complete eligibility requirements, limitations on the exclusion amount and exceptions to the two-year rule
https://www.irs.gov/publications/p523/index.html
Thank you for your time with this. I am aware of, but have not read through the IRS pub. you note. I am familiar with some of what is mentioned. At the very least and with my limited knowledge of tax code; the cost and sell basis of their mother's home would be equal in value. There wouldn't be a capital gain.
I don't think this relates directly to the "inherited" house from their mother, which they sold. This was never a primary residence for either sibling.
Catch
As with any other gift, the cost basis of the house is transferred, not reset. So the siblings have a long term gain equal to the selling price ($100K) less the mother's original purchase price (including any improvements), minus costs of selling (e.g. realtor fees), minus acquisition fees (costs when mother originally acquired home).
The question Dennis1 is addressing is whether that gain (or a portion) can be excluded from taxation. Since the siblings didn't live in it for two years, the maximum they can exclude is less than the usual $250K. If the did use the house as their primary residence for a shorter period (perhaps the two months between passing and sale), then the $250K cap is prorated. For example, 2 months use would allow an exemption of 2/24 x $250K or about $20K of gain.
Since the estate is so small, estate taxes are not an issue here. The general case though is that the gift of the home should have been reported on the mother's tax return, since the value gifted likely exceeded the $11K gift exclusion per recipient ten years ago. So the mother's estate tax exemption (now $5.43m federal) should be reduced by:
"value of home at time of gift" minus $22K (i.e. 2 x $11K gift exclusion to two siblings).
As you wrote, these are some thoughts and not advice. I may not have all the facts, I may be misquoting the rules, etc.
Thank you as always for your insights, even with missing pieces of data; which are missing, as I am recalling from a verbal conversation of several weeks ago. I am aware of other types of "quitclaim" deeds. I do not know the type that was used; as some states allow a "transfer upon death" deed. I may have an opportunity to chat about this after the new year with one of these two folks noted. I will try to pick their brain for more info.
I did suggest that they should consider a meet with a tax attorney once they have all information available to them, to determine the nature, if any; a possible taxable situation.
Per what I was able to offer, the term "inherit" is a bit loose on the legal edge; and likely they were "gifted".
While wandering the internet a bit, I noticed one quitclaim deed indicated a right of survivor-ship. This may be a very common form of this document and standard wording.
I am curious to this area, as many of us will travel into this legal area. I'm always trying to gather correct information as a guide.
Thank you again.
Catch
If the deed were properly set up as transfer on death (and in a state that allowed them), it seems the house would get a step up in basis, and there would be no gain on sale. Even so, I'd be inclined to report the sale on Schedule D, just as one reports bond sales at maturity (where sale price = purchase price, and gain = 0).
When I read your latter post, what first came to mind was a present gift of a future interest. Sounds like a mouthful, but it's not that complex. (Then again, I like Möbius strips.)
Think of the timeline of the house. It exists before death and after death. Put the two pieces together and you have the whole house. But it is possible to separate them. She may have, ten years ago (in her "present"), given away the "future" part that would exist after her death. (She would have retained ownership so long as she lived, i.e. a life estate.)
From what you wrote, it sounds more likely that what was done was the former (transfer on death deed). For completeness, I checked on the tax treatment of the latter (present gift of future interest). Here's what I found:
http://wills.about.com/od/understandingestatetaxes/qt/giftssubjecttotax.htm
In short, the treatment would be as I described for the gift before, except that there would be no $11K (per sibling) gift exclusion on the estate tax. I didn't know this either - which is why these questions are so interesting - I learn as much as anyone else.
For those with an interest in this area of estate planning, is the below link with a few more pieces of information. Do note that not all states allow these type of deeds and 3 other states have a "Lady Bird" type of deed. As usual, any of these statues may be changed/modified by state legislation; at any given time.
The below link regards T.O.D. / Beneficiary deeds. About seven years ago I directed an acquaintance to investigate the beneficiary deed that was available in a state where they would be involved in the future transfer of real estate from a mother to her children upon the mother's death.
http://wills.about.com/od/howtoavoidprobate/qt/How-To-Use-A-Transfer-On-Death-Deed-Or-Beneficiary-Deed-To-Avoid-Probate.htm
Regards,
Catch