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Chad Oberg
Chad Oberg, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 174
Experience:  10 + years of accounting and tax experience, financial statements and business planning
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My brother and I were jointly gifted our parents home under

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My brother and I were jointly gifted our parents home under a quit claim deed for $1.00. Both our parents passed away in 2008. We sold the house 7 months later in 2009 for $230,500 (minus typical expenses) and used the money to jointly buy a condo for my brother to live in for $185,000. Do we owe capital gains tax? On what basis? Can it be rolled over under a 1031 exchange? Would the tax consequences be different if we had inherited the house and then sold it? Under estate taxes , would the $230,000 be less than the minimum amount taxed?
Submitted: 4 years ago.
Category: Tax
Expert:  Chad Oberg replied 4 years ago.

Customer,

 

1. Yes you may owe capital gains tax.

2. When there is a gifting, you would use the parents basis in the property. If it was inherited, you would get a step-up in basis at the date of the last parents death. See TurboTax article attached as follows:

 

http://turbotax.intuit.com/tax-tools/tax-tips/tax-planning-and-checklists/5533.html

 

You will want to do your best to increase your parents basis in the property as much as possible. Include all upgrades and work done to the property to minimize the capital gain.

 

3. Unfortunately, if the transactions are already closed, you cannot utilize a 1031 exchange.

4. Yes the tax consequences would be different if you had inherited the house and then sold it as mentioned above.

5. To determine the best scenario, you will need to get your parents basis in the property.

 

If you have any questions, do not hesitate to contact me.

 

Regards,

 

Chad

Customer: replied 4 years ago.

They purchased the house in 1957 for $13,500. Over the year, in additon to normal upkeep, painting, etc. They had the roof replaced the basement finished and a breezway and 2 car garage built. At best, XXXXX XXXXX would probably be no more than $60,000.

 

Is there no ability to roll over the capital gains unitl the sale of the condo we purchased? Must we consider this under a quit claim deed if we never knew about it until after the fact and never paid the dollar?

 

If we had inherited instead, would the $230,500 be below the amount taxed under the estate tax?

Expert:  Chad Oberg replied 4 years ago.

Customer,

 

You would have got basis at the fair market value at date of death. Say FMV was $200,000. Then the gain would be calculated (Sales Price - $200,000 - Selling Cost).

 

If the transactions are closed, there is no way to structure a 1031 exchange. The problem with 1031 is that if you ever had access to the cash, you violated the rules of 1031. Therefore, it doesn't appear to be possible. See instructions for 1031 as follows: http://www.irs.gov/pub/irs-pdf/i8824.pdf

 

If you can substantiate either you or your brother living and owning in the property for 2 of the last 5 years, you may qualify for the $250,000 exclusion. If you or your brother can't meet this test but lived in the property for a while, there are some exceptions where you can prorate the $250,000 exclusion (such as health problems).

 

I would recommending, brainstorming to come up with as many additional expenses (flooring, plumbing, anything) you can associate with the property, include all escrow cost.

 

I don't believe there is anyway to invalidate the quick claim. You would need to consult with an attorney on this issue.

 

Regards,

 

Chad

 

 

 

Customer: replied 4 years ago.

Well, the reason we sold the house and purchased the condo for my brother is so he could be closer to me since our parents are not alive, I need to take care of him. He is deaf with cerebral palsy and does not work. He is on SSI (disability benefits). Does that count as a health issue?

Expert:  Chad Oberg replied 4 years ago.

Yes,

 

See the following IRS Publication 523 page 14-15. As long as you can substantiate that your brother was living in the house and was the owner there should not be any problem. Pay careful attentions to the rules for living in the house and also how to limit the exclusion.

 

http://www.irs.gov/pub/irs-pdf/p523.pdf

 

I think this is your best bet to minimize the gain.

 

Regards,

 

Chad

Customer: replied 4 years ago.
This will be my last reply before accepting. I appreciate all your help. However, he did not live in the house prior to their death, although he lived close by. He was in Massachusetts and moved out of state to be near me. Does this mean there is no relief under any IRS regulation on the capital gains?
Expert:  Chad Oberg replied 4 years ago.

Customer,

 

The only other items I can think of are below:

 

You may want to check into whether your parent filed a gift tax return also. When a gift value is over $13,000 (per parent) to you, the parent is required to file a gift tax return. If they paid gift taxes, which is highly unlikely since they would probably utilize the exclusion, you would have an increase in basis also.

 

If you utilize a CPA or accountant to do your taxes, have them take a few minutes to go over the transaction to make sure there is nothing missed. It is always a bit of a challenge to understand every nuance of a tax situation over this website. If you do not have a CPA, I would recommend spending the extra $ this year to help protect yourself since 15% + any state rate is a significant number. Even if you have someone look at what you are going to file before you file the tax return is helpful.

 

Remember be innovative in thinking of all the expenses your parents shelled out over the years for the basis of the asset.

 

Regards and good luck,

 

Chad

Chad Oberg, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 174
Experience: 10 + years of accounting and tax experience, financial statements and business planning
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