Real estate capital gains - advice needed

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
khale7
Posts: 14
Joined: Mon Nov 25, 2013 1:03 am

Real estate capital gains - advice needed

Post by khale7 » Sat Nov 17, 2018 6:24 am

Hello Bogleheads,
My wife just found out that she and her sister were listed on their Dads house as co-owners. She had thought it was just her sister. Anyways, their dad passed away 5 months ago and now they’re selling the house (in Illinois). Both sisters moved out years ago and hence not their primary residence. My wife and I have been out of the country for a while now and do not maintain residency in any state (we file federal taxes only - jointly).

Do we have to file state taxes in Illinois? Since the sale will definitely incur capital gains. Appreciate any feedback

Thanks.

StopIroningShirts
Posts: 76
Joined: Sat Nov 10, 2018 7:20 pm
Location: US - Currently in South Carolina
Contact:

Re: Real estate capital gains - advice needed

Post by StopIroningShirts » Sat Nov 17, 2018 7:49 am

I'm going to step into this, but my disclaimer is you may want to hire an Illinois based accountant.

If your dad lived in the house for at least two out of the last five years, the first $250,000 in capital gains should be tax free at the federal level. I think its justifiable that its his house if he lived in the house, originally bought the house, ect, that it was his home and you all were on the title for estate planning purposes.

I don't know the state tax implications or what happens if it was over $250,000 in gains. Past my understanding.

jminv
Posts: 1039
Joined: Tue Jan 02, 2018 10:58 pm

Re: Real estate capital gains - advice needed

Post by jminv » Sat Nov 17, 2018 8:32 am

khale7 wrote:
Sat Nov 17, 2018 6:24 am
Hello Bogleheads,
My wife just found out that she and her sister were listed on their Dads house as co-owners. She had thought it was just her sister. Anyways, their dad passed away 5 months ago and now they’re selling the house (in Illinois). Both sisters moved out years ago and hence not their primary residence. My wife and I have been out of the country for a while now and do not maintain residency in any state (we file federal taxes only - jointly).

Do we have to file state taxes in Illinois? Since the sale will definitely incur capital gains. Appreciate any feedback

Thanks.
Co owners or was it transfer on death? It would seem more likely to be transfer on death since your wife didn’t know she co owned a house. This would matter since your wife could benefit from a stepped up cost basis at date of death and end up owing no tax, depending on what the market value has done in the last 5 months. Do some research into it, don’t assume that you’ll owe taxes on the original basis.

Gill
Posts: 6003
Joined: Sun Mar 04, 2007 8:38 pm
Location: Florida

Re: Real estate capital gains - advice needed

Post by Gill » Sat Nov 17, 2018 8:38 am

There may be no capital gains at all because there is a stepped up basis. Yes, if sold at a gain you would normally have to file a return with the state where the property is located.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal

Topic Author
khale7
Posts: 14
Joined: Mon Nov 25, 2013 1:03 am

Re: Real estate capital gains - advice needed

Post by khale7 » Sun Nov 18, 2018 2:05 pm

Thanks all. It was co-owned. DW thought she gave up ownership some 20 years ago.

euroswiss
Posts: 243
Joined: Sun Oct 25, 2015 4:40 pm

Re: Real estate capital gains - advice needed

Post by euroswiss » Mon Nov 19, 2018 10:04 am

khale7 wrote:
Sun Nov 18, 2018 2:05 pm
Thanks all. It was co-owned. DW thought she gave up ownership some 20 years ago.
So, if I understand correctly then your dad was really your sister’s and your tenant (even if he paid no rent) and has not been on the deed for the house for 20+ years? If that is the case, then the tax situation is likely even worse than you think because you may have to recapture appreciation on top of capital gains.
If all three of you were on the deed then your dad’s portion will get step up treatment and yours will be taxed. Consult an accountant!

Gill
Posts: 6003
Joined: Sun Mar 04, 2007 8:38 pm
Location: Florida

Re: Real estate capital gains - advice needed

Post by Gill » Mon Nov 19, 2018 10:18 am

euroswiss wrote:
Mon Nov 19, 2018 10:04 am
khale7 wrote:
Sun Nov 18, 2018 2:05 pm
Thanks all. It was co-owned. DW thought she gave up ownership some 20 years ago.
So, if I understand correctly then your dad was really your sister’s and your tenant (even if he paid no rent) and has not been on the deed for the house for 20+ years? If that is the case, then the tax situation is likely even worse than you think because you may have to recapture appreciation on top of capital gains.
If all three of you were on the deed then your dad’s portion will get step up treatment and yours will be taxed. Consult an accountant!
What?? There is no rental situation here. As I understand the facts, father continued to own the house and put the two children on the deed as joint owners. There should be a full stepup in basis because presumably the father originally provided all the consideration for the house.
Gill
Last edited by Gill on Mon Nov 19, 2018 7:00 pm, edited 1 time in total.
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal

Carefreeap
Posts: 2682
Joined: Tue Jan 13, 2015 7:36 pm
Location: SF Bay Area

Re: Real estate capital gains - advice needed

Post by Carefreeap » Mon Nov 19, 2018 6:57 pm

khale7 wrote:
Sat Nov 17, 2018 6:24 am
Hello Bogleheads,
My wife just found out that she and her sister were listed on their Dads house as co-owners. She had thought it was just her sister. Anyways, their dad passed away 5 months ago and now they’re selling the house (in Illinois). Both sisters moved out years ago and hence not their primary residence. My wife and I have been out of the country for a while now and do not maintain residency in any state (we file federal taxes only - jointly).

Do we have to file state taxes in Illinois? Since the sale will definitely incur capital gains. Appreciate any feedback

Thanks.
Please seek the advice of a good CPA. It may depend on how title was held e.g. joint tenants or tenants in common.

vested1
Posts: 1897
Joined: Wed Jan 04, 2012 4:20 pm

Re: Real estate capital gains - advice needed

Post by vested1 » Tue Nov 20, 2018 10:48 am

We're going through this right now. Gill is correct IMHO. Consulting a good CPA who is knowledgeable in the filing rules of the State where the house is located is essential.

My MIL died at the end of July and the condo was in a Life Estate, which should be about the same as being named as co-owner, as my wife was. An affidavit of Death was issued and my MIL was removed from the deed, which was reissued naming 4 siblings as the remaining owners. A step up in basis was determined based on the date of death.

The OP should remember that the RE commission and some closing costs should be added to the stepped up basis to determine if there is any capital gains liability. Since the death occurred only 5 months ago, the possibility of gain that surpasses the commission and closing costs should be zero.

Example using made up numbers:

Home value at date of death = $200,000 (stepped up basis)
House sold for $205,000
Commission and qualified closing costs (combined 6% of 205k) = $12,300
200,000 + 12,300 = 212,300

In the example, the house would have to sell for more than $212,300 for there to be any capital gains liability, and only the amount over $212,300 would be subject to capital gains taxes. Instead there was a loss of $12,300 - $5,000 (difference between stepped up basis and sold price) = $7,300, so no tax due. The same rules for step up in basis apply for federal taxes.

Gill will hopefully correct me if I'm wrong.

Also be aware that the title company may (depending on the State where the house is located) assess a pre-withholding State real estate tax. In our case (California) the tax they were going to withhold 3.3% of the sales price, which was over $17,000. We asked them not to withhold the tax because there would be no tax due. If it is withheld and no taxes are due the sellers (multiple in the OP's case) have to wait until State tax returns are filed to recoup the overpayment of taxes. There are forms to fill out which are submitted to the State when filing the return in either case.

Topic Author
khale7
Posts: 14
Joined: Mon Nov 25, 2013 1:03 am

Re: Real estate capital gains - advice needed

Post by khale7 » Tue Nov 20, 2018 10:58 pm

Vested1, thank you. Will definitely seek professional advice. Appreciate all the feedback.

MarkNYC
Posts: 1665
Joined: Mon May 05, 2008 7:58 pm

Re: Real estate capital gains - advice needed

Post by MarkNYC » Wed Nov 21, 2018 9:42 am

Yes, you should file an IL tax return.

If there is a gain on the sale, you would need to file the IL tax return to pay the tax on the IL-source gain.

Even if no gain on the sale, a Form 1099-S should be filed reporting the sale. There are several parties that might file the form so you can never be certain the form was not filed, even if you don't receive a copy. If the IRS shares the 1099-S information with the state, the state will be looking for a tax return reporting the sale. If no IL tax return is filed, you may eventually get a tax assessment from IL based on the gross sales proceeds, even though there was no gain so no IL tax is actually due.

Post Reply