In 2015 I bought a house for my elderly parents to live in and on the deed for that property all three of us – my Mom, my Dad, and I – were all listed as owners with “right of survivorship”, meaning that which ever of us lived the longest would become the sole owner of the property without the property needing to go through probate. I paid $170K for the place, they paid nothing toward the purchase of the property but they lived in the place and paid the local taxes, HOA fees,and maintenance expenses on it as if they were the sole owners and, as noted before, their names were on the deed. My father passed away in 2016, my Mom passed away in 2022, and then I sold the place for $320,000 a couple of months after her death. So here’s the question:
Will I need to pay Federal and State income tax on the $150K gain because the place was not my primary residence OR do I owe nothing because it’s inherited property?
Real Estate Capital Gains Tax Question
Re: Real Estate Capital Gains Tax Question
The Section 121 exclusion wouldn't apply because it sounds like the property was not your primary residence for at least two of the last five years.
How much of the basis is inherited would depend on what state you live in (community property or not). You might get a stepped up basis on the 2/3 portion that was your parents share and just have a gain on your 1/3. Or not, it depends.
How much of the basis is inherited would depend on what state you live in (community property or not). You might get a stepped up basis on the 2/3 portion that was your parents share and just have a gain on your 1/3. Or not, it depends.
Re: Real Estate Capital Gains Tax Question
You'd actually get a stepped-up basis in 2 parts. When your father died, his share would pass to you and your mother with a stepped-up basis. You then became a 50% owner with a new base. When your mother died, you get a stepped-up basis on her 50% as of that time. As mentioned above, you are not excluded from paying whatever gain there is, net of those basis adjustments (and the usual selling/improvement expenses).
Re: Real Estate Capital Gains Tax Question
Not being a CPA or lawyer, I don't know how each person's interest in the property would be calculated, even though the deed indicated JTWROS, given the circumstances of the purchase and operation of the house, especially if there was not written documentation between parties.
I think you could make the argument that they were buying some of your full original interest (basis) by their paying for your 1/3 of local taxes, HOA fees,and maintenance expenses. On the other hand, you would have to make the argument that you were gifting them your 1/3 interest in the house as annual free rent, while they were living there (probably less than the $30K to $32K annual exemptions from you to them as couple).
I think you could make the argument that they were buying some of your full original interest (basis) by their paying for your 1/3 of local taxes, HOA fees,and maintenance expenses. On the other hand, you would have to make the argument that you were gifting them your 1/3 interest in the house as annual free rent, while they were living there (probably less than the $30K to $32K annual exemptions from you to them as couple).
Re: Real Estate Capital Gains Tax Question
Sorry for your losses.
Did you file a gift tax return when you purchased the house in 2015 and gifted to your parents? If this was truly a gift, such a filing was required. The value of the gift may have been based on your parent’s life expectancy or may have been as much as 2/3 of the total cost of the house.
If this was not a gift in 2015, then it is less clear what interest in excess of a nominal ownership interest, if anything, your parents owned that they could have passed to you when they each died. It would only be the transferred interest that would get a step up on basis.
It may be worth discussing the proper treatment of the sale with a tax professional. Now would be the time to file the gift tax return if that it is appropriate based on the facts. It is not likely that tax would actually be due in connection with the gift tax return.
Did you file a gift tax return when you purchased the house in 2015 and gifted to your parents? If this was truly a gift, such a filing was required. The value of the gift may have been based on your parent’s life expectancy or may have been as much as 2/3 of the total cost of the house.
If this was not a gift in 2015, then it is less clear what interest in excess of a nominal ownership interest, if anything, your parents owned that they could have passed to you when they each died. It would only be the transferred interest that would get a step up on basis.
It may be worth discussing the proper treatment of the sale with a tax professional. Now would be the time to file the gift tax return if that it is appropriate based on the facts. It is not likely that tax would actually be due in connection with the gift tax return.