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Stephen G.
Stephen G., Financial Advisor
Category: Capital Gains and Losses
Satisfied Customers: 6454
Experience:  Senior Tax Expert; CPA/PFS(retired)Personal Financial Planner; Small Business & Professional Mergers & Acquisitions
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I bought my mother's home when she passed (bought out 3 brothers),

Customer Question

I bought my mother's home when she passed (bought out 3 brothers), and my sister lived there for four years. It is not my primary residence but I was only one on deed. I am selling it now, and will make a profit from the original purchase to sale price of about $55,000. I want to buy a vacation/rental property and put the profit of the house sale toward the vacation/rental home. What will I owe on capital gains? Is there any way to limit what I pay?
Submitted: 1 year ago.
Category: Capital Gains and Losses
Expert:  Stephen G. replied 1 year ago.
Hello, my name is***** & I'll be helping you today. My goal is to give you a complete & accurate answer that you can understand.

Did you purchase the property for the value that it was appraised for in your mother's estate? Did your sister inherit any interest in the property?

If you inherited a portion of the property along with your brothers, and the property was included in your mother's estate, then how did you determine your tax basis in the portion of the property you inherited? Also, the question about your sister could impact your gain unless she was excluded from this property.

Steve G

Customer: replied 1 year ago.
When I decided to buy out my brothers and have my sister live there we had the house appraised and paid my brother's their 20% each. My sister and I each had 20% of my mother's estate. I am not sure what you mean by determining the tax basis in the portion of the house I inherited? My sister was not excluded from the property, she was on the deed originally but taken off about a year ago as she was facing tax issues that I feared might result in a lien on the home. She did a Quit Claim.
Expert:  Stephen G. replied 1 year ago.
So are you buying out your sister or is she sharing in 20% of the sale you are making now?
Well, your 20% original tax basis in the property would be 20% of the fair market value of the property at your mother's date of death. Your sister's tax basis in the property would be the same, even if you were holding the title in your name for her to protect her from tax issues or for any reason for that matter.
So, my question is did you include your 20% interest in the property in your computation of the 55K gain? Does that also include your sister's 20% interest on the same basis?
Customer: replied 1 year ago.
It includes my sister's 20%
Expert:  Stephen G. replied 1 year ago.
Well, I'm trying to respond to your question of what can be done, if anything, to limit your capital gains taxes.
So, the other question you didn't answer was what value did you use to include both your & your sister's 20%?
Now, despite the fact that your sister deeded over her 20% to you, for whatever reason, say to protect her interest; if both she lived in the home & owned it (to the extent of her 20% interest) for any 2 of the previous 5 years ending on the date of sale, her capital gain may be excluded from tax up to a total of $250,000.
So, in your computations, that will exclude 20% of the capital gain. Actually, she wouldn't even have to report the sale on her tax return to qualify for the exclusion.
If you are able to have the sale structured such that 80% of the transaction is reported to you on Form 1099S and 20% is supported by the standard statement at the closing that 20% is allocated to your sister as her primary residence qualifying for the exclusion, that 20% doesn't get reported at all & isn't reported on her tax return.
If that isn't possible, for whatever reason, then it still can be dealt with even if 100% is reported to you on Form 1099S. That can be dealt with on your tax return, and 20% may be excluded and allocated to your sister.
As far as anything else is concerned, there's really nothing else you can do in terms of investing in a vacation home.
You actual capital gains tax will depend upon your other taxable income as that is what determines the capital gains tax rate that would apply.
Most likely, your federal capital gains tax it will work out to somewhere between 15% - 20% of the gain. It may be less, but should not be more. You didn't mention your state, but if you live in a state with an income tax, you'll have to add that to the total. Usually, that would run between 5%-10%.
Expert:  Stephen G. replied 1 year ago.
I see you have had a chance to review my last set of comments/answers. Do you have any additional questions or may I clarify anything for you?
If so, please don't hesitate to ask.
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