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Thomas McJD
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Category: Real Estate Law
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Experience:  Real Estate Attorney
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Brother-in-law was given live inheritance (house and land)

Resolved Question:

Brother-in-law was given live inheritance (house and land) approximately 10 years ago by his parents. Last parent (father died 10/2011). The house has now sold and my brother-in-law has been told that he will have to pay an exorbitant amount of tax (both federal and state - Georgia). Is this true?
Submitted: 1 year ago.
Category: Real Estate Law
Expert:  Ely replied 1 year ago.
Hello friend. My name is XXXXX XXXXX welcome to JustAnswer. Please note: (1) this is general information only, not legal advice, and, (2) there may be a slight delay between your follow ups and my replies.

Can you please tell me:

1) who has he been told this by, and
2) were they particular in regards XXXXX XXXXX tax, specifically?

This is not an answer, but an Information Request. I need this information to answer your question. Please reply, so I can answer your question. Thank you in advance.
Customer: replied 1 year ago.

Before we begin, I note that the above states this is not legal advice. If you are a tax attorney why is this not considered legal advice?


In this situation I will need printed information to share with my brother-in-law and his wife, which should show that you are a real estate tax attorney.


 


Debbie

Expert:  Ely replied 1 year ago.
Debbie,

I am sorry, but I cannot share more than what is posted in my profile. I am going to opt out of your question and open this up for other experts.

Your JustAnswer Account has not been charged for this conversation and your question is back in the queue. You do not have to stay online for the question to be active. Should an expert pick it up, you should be alerted via email and/or SMS (text message) unless you actively disable these features.

There is no need for you to reply at this time as this may "lock" your question back to me, thus inadvertently delaying other experts' access to it.

My apologies for any inconvenience and good luck...
Expert:  Thomas McJD replied 1 year ago.
Hi, I will be happy to assist you, and it is my goal to make you a very satisfied customer! This may take a few minutes, so thanks for your patience.

As you noted, the information you obtain from JustAnswer is not legal advice and there is no attorney client-relationship. We can provide general information concerning the law which relates to your question. Would you like to proceed?
Customer: replied 1 year ago.

Hello TMcJD. Will I be able to have a printed version (or can I print) of our conversation to recap what information you provide?


Debbie


 


 

Expert:  Thomas McJD replied 1 year ago.
Yes, you can refer to the information and share that. Just please be aware that you are not receiving legal advice. Would you still like to proceed?
Customer: replied 1 year ago.

Yes.


 

Expert:  Thomas McJD replied 1 year ago.
Okay, I do have a few questions for clarification:

1. This was gifted to your brother in law from his parents while they were living - is that correct?

2. What was the value of the home when gifted to him (if you know and it was gifted during their lives)?

3. What was the sale price (if you know)?

4. Did your brother in law live in the home as his primary residence?
Customer: replied 1 year ago.

1. Yes.


2. Unknown


 


3. 72,000.00 USD


 


4. No. The home was rented for approximately 6-8 months after his father's death.

Expert:  Thomas McJD replied 1 year ago.
Okay. Thank you.

Since the home was gifted to him during his parents' lifetimes, then it was a gift and not an inheritance.

Anytime property is sold there are potential capital gains taxes assessed by the federal and state governments. The taxable gain is calculated based on the sale price and the person's basis in the property.

With a gift, the basis is the same as the basis for the owners that made a gift to the new owner or owners. In this case, your brother in law's basis is the same as his parents' basis in the property. If they purchased the property for $20,000 (for example), then your brother in law took their basis of $20,000 at the time they gifted the property to him.

When he later sold the property for $72,000 then he had a taxable capital gain of $52,000 (based on the example $20,000 basis -- it could actually be a bigger or smaller gain depending on the actual basis he took from his parents).

That gain is generally taxed at 15% by the federal government and 6% in Georgia. Thus, he could be looking at paying around 21% on his gain. If that is anywhere close to the gain calculated based on my example, then taxes would be around $11,000.

This is why it is oftentimes advisable not to make a gift during life but to allow a child or other beneficiary to inherit property upon death. When inheritance takes place on death, the basis is not the same as the basis of the owner that died (as is the case with a gift). With inheritance, the new owner takes a stepped up basis. The new basis becomes the value of property at the time of death. Thus, a sale taking place a few months later generally will have no taxable gain.

Unfortunately, there is no way to avoid a taxable capital gain on a home that is not a primary residence.
Customer: replied 1 year ago.

In your example above, "if they purchased the property for 20,000 . . . etc. etc." . . . . what if the home was valued (at the time it was gifted) the same amount it was sold for, which is 72,000 USD?

Expert:  Thomas McJD replied 1 year ago.
Unfortunately it doesn't matter what its value was at the time of the gift. That does not determine the parents' basis or your brother in law's basis. As noted, he simply takes his parents' basis. Their basis is the price they purchased the property for with any adjustments for capital improvements made to the property (for example, if they spent $50,000 in a renovation that might make an allowable increase to the basis). Generally, though, a basis stays very close to the purchase price and it was likely much lower than the sales price.
Customer: replied 1 year ago.


For clarity, the capital gains is based on the difference between the purchase price and the sales price . . . is this correct?

Expert:  Thomas McJD replied 1 year ago.
No, it's based on the difference between the sales/purchase price and the basis. The basis is usually the original owner's (his parents' purchase price) but not always. But I believe you are understanding correct.
Customer: replied 1 year ago.

I want to be totally clear on what the term "basis" means. For example, let's say my in-laws paid 50,000 USD for the home when it was built in 1980 . . . what amount of taxes would be owed now that it has sold for 72,000 USD?

Expert:  Thomas McJD replied 1 year ago.
Their basis would generally be $50,000. The gain would be $22,000 based on the sales price. The taxes (based on the rates as noted above -- generally 15% and 6%, federal and state respectively) would be approximately $4,620
Customer: replied 1 year ago.

Okay. Understood.


Just want to thank you TMcJD for your help. Please respond and I will rate and proceed with closure.


 


Debbie

Expert:  Thomas McJD replied 1 year ago.
You're very welcome. I'm glad I could help. Please let me know if you need help with anything in the future. Have a great day!
Thomas McJD, Lawyer
Category: Real Estate Law
Satisfied Customers: 6510
Experience: Real Estate Attorney
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