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taxmanrog
taxmanrog, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 385
Experience:  Licensed CPA, MA, MST with 29 year's experience. Teach Accounting and Tax courses at Masters level.
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Mom executed a deeded trust to me for her home and property

Customer Question

Mom executed a deeded trust to me for her home and property while she was in a nursing home (2 years) prior to her death. She had free use of her property while she was living and was able to continue to rent some of the property to a farmer for raising crops on an annual basis. Upon her death the property passed to me alone. I thought I was making matters easier on my sisters by not having POAs flying back and forth across the country. 2 1/2 months after her death I sold the property for $230K. I want to divide up the proceeds evenly and send them to my sisters but I'm concerned I will face a "capital gains" tax on my own. The title company gave me a 1099 for the whole amount. My question is: Can I turn around and send my sisters a 1099 for their portion? Can I then subtract those 2 amounts from my income/capital gains? They can then pay any tax due based on their income rather than me paying tax on the whole amount. Or can I consider this an inheritance and avoid any tax at all?
Submitted: 1 year ago.
Category: Tax
Expert:  R. Klein, EA replied 1 year ago.

Randalltax : Thank you for contacting me about your Tax issue. I will work hard to help you understand the issue clearly.
Randalltax : since you received the property as a gift prior to your mother's passing, this is to considered an inheritance at all. Under the tax law, your cost basis in the property is the same as your mother's.
Randalltax : in order to determine the capital gain, you take the selling price (less any commissions and fix up and selling costs) and subtract from the cost basis. If your mother paid 50k for the property and you sold or 230k, then you would have a gain of 180k
Randalltax : this is consider long term gain and subject to the lower tax rates, up to a maximum of 25%, depending on your other income.
Randalltax : you can certainly gift any of the after tax profit so your siblings, but you are unable to spli the gain per tax with them because you were the only legal owner prior o the sale per the deed.
Randalltax : i meant to type " pretax gain"
Randalltax : also, this is NOT an inheritance. .
Randalltax : If you had received the property AFTER your mother's passing, the cost basis would have been the value of the house on he date of death and you likely would have had no taxable gain.
Randalltax : what difficulty you saved in avoiding probate on the house, you pay in income taxes because of lack of tax planning.
Randalltax : i hate typing on the iPad because it changes many of the words (sigh)
Customer:

Your answer is as I thought. How do I figure my "cost basis" since 1. The date of the deeded trust was about about 2 years ago (no money changed hands) 2. Between date of death and sale of property was only 2 1/2 months. ?

Randalltax : None of hose factors affect cost basis. The cost basis is what your mother paid for the house plus any improvements.
Customer:

How do I determine what she paid in 1957?

Randalltax : you may have to check her historical records or may a "guesstimate" based on property values when she bought the house
Customer:

Can I leave this chat and come back in about 3 hours? (going to church)

Randalltax : U may come back at any time.
Randalltax : to close the question, simply make a rating.
Randalltax : thanks!
Randalltax : I will answer any reasonable follows questions at no additional cost
Customer:

Well what I meant was, can I keep on clarifying later without leaving chat?

Customer:

Thanks, XXXXX XXXXX

Randalltax : U can come and o in chat, bu I may not be here when u return. You can type a question and I will respond when I return
Randalltax : The question stays open until u determine we are done.
Customer:

Why is the tax basis the same for me as it would have been for her? I assume I can deduct the cost of improvements to the property including the house, garage and out buildings (as well as closing costs)? When I guesstimate the improvements, how can I maintain a defensible position on those costs? If 25% is maximum tax on long term? capitals gains, what would be tax on say... half the amount I mentioned? How can I show my sisters the tax on only the capital gains rather than all my tax liability?

Customer:

I meant "cost basis".

Customer:

I should have engaged a CPA rather than hoping 2 different lawyers would look out for my interests.

Expert:  taxmanrog replied 1 year ago.

The expert you talked to above is no longer online, while I see you are, so if I may, I would like to answer your questions and clarify the issues.

 

For 2013, the capital gains tax rate is 0% if you are in the 10-15% tax bracket. It raises to 20% if you are in the 25, 28, or 33% tax brackets. If you are in the 35% bracket and your AGI is over $200k for single, $250k for married, the rate is 15% plus a 3.8% surtax. If you are in the 39.6% bracket, the rate is 20%.

 

The 25% rate that the expert above mentioned is very limited, and only for certain rental properties that were depreciated. If your mom rented the land to a farmer, land is not depreciable, so the rate should not apply if that is the only rental income.

 

You cannot deduct the cost of the improvements. What you have to do is to take your mom's original cost, as the expert above stated, and add the cost of any improvements to it. You are correct when you ask about proof for "guesstimates" that the expert above suggested. The IRS says if you can't prove basis, the basis is zero. However, there are many ways to prove basis! It may take some digging, but your mom would have had to get building permits to construct the home and for the improvements. The permits require the contractor or owner to list the cost of the construction, so that the assessor can more properly assess tax.

 

One question, however, that may make things easier - what about your father? If he owned the property and then left it to your mom when he passed away, you get a "step up" in basis to the FMV at the time he passed away. This may be easier to determine, as you can get comparable sales from the time and use those for establishing the cost basis.

 

The rules say that when someone gifts you property, as your mom did when she went into the nursing home, it is not an "arms-length" transaction, so you can't use that for establishing basis. You therefore get your mom's cost basis. Which, as I mentioned above, could be more than cost if your father owned it prior to your mom.

 

You asked about your sisters. You can allocate part of the sales price to your sisters, and they can report it on their tax return, although if the property was deeded to you, and you gave part to them, it could be construed as a gift, and there could be gift tax implications for you. Since capital gains is a flat tax on the net gain, you can easily allocate part of the tax cost to your sisters. If you calculate that the gain is 15% of the net, you can simply have your sisters pay their share. However, this would mean that you have to give them some of the sales price first.

 

As far as you wanting to deduct the cost of improvements, such as the garage, outbuildings, etc., these can't be deducted on your tax return. They get added to the basis of the property (which I discussed above) and reduce your capital gain.

 

I hope that I have added to your information and answered your additional questions. If you have any more questions or need clarification, please feel free to ask away!

 

Have a great weekend, or what is left of it!

taxmanrog, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 385
Experience: Licensed CPA, MA, MST with 29 year's experience. Teach Accounting and Tax courses at Masters level.
taxmanrog and 5 other Tax Specialists are ready to help you
Customer: replied 1 year ago.

The vacant farm land was purchased around 1956-57 by mom and dad from mom's parents. Dad built the house in 1957 and outbuildings a couple of years after. Dad died in 2006 leaving mom everything. You're saying I can take the "step up" cost basis from the date he died, rather than from 1957? You're saying I can use comparable sales from the date dad passed away? Then I subtract that from the recent sales price after deductions is the taxable amount? That sounds doable. What is FMV? I misunderstood "cost basis", higher is better. Does the comparable sales have to be done by a licensed appraiser or can my Realtor do it? Dad died 2-14-2006. Over what time period can comparable sales be calculated? 6 months before and after that date?

Expert:  taxmanrog replied 1 year ago.

That is exactly what I am saying! If your dad owned the property and left it to your mom when he passed away, the value of it on the date he passed away in 2006 is your cost basis. This is good news for you, because what your dad paid your grandparents plus the cost to construct the house, even if you add all the improvements, is probably substantially less than the FMV (fair market value) on the date he passed away in 2006! The higher the basis, the less gain there is to pay tax on!

 

You could have an appraiser calculate the FMV for February 2006. But you also could use a realtor, or you could do it yourself! You go through the property sales records from the tax assessor's office or the county recorder's office, where you can come up with comparable prices for the land and house value in 2006.

 

Another alternative that the IRS accepts is the actual tax assessor's records. Here in Illinois, the assessor lists the FMV of the property and uses that to compute the real estate tax. I see you are in Indiana. I believe that the assessors there use a similar calculation. So you could simply pull out the assessed value in 2006, and use that. It would be very simple to do this.

 

Your basis for calculating the gain or loss is this value in 2006, plus any improvements that you or your mom made since then.

 

I hope this helps answer your questions! If you have any more please let me know.

 

Roger

Customer: replied 1 year ago.

Hopefully you got paid yesterday.


 


Yesterday you said:


 


"what about your father? If he owned the property and then left it to your mom when he passed away, you get a "step up" in basis to the FMV at the time he passed away. "


 


Does it make a difference they owned the property together when he died?


 

Expert:  taxmanrog replied 1 year ago.

It may. For jointly held assets, the IRS allows that there be a tracing as to who paid for the item. Did your mom work or have a job? If your dad paid for the property, and you can show your mom didn't pay for it, you can allocate the cost to him then get a larger step-up in basis.

 

If they held it jointly and both paid for it, then you have to do some more legwork. You need to go find out what the cost basis was (back to what I said about recorded deeds, building permits, etc.) and your mom's basis would be 50% of the cost PLUS 50% of the Fair Market Value at the date your dad passed away.

 

So if your mom and dad's cost basis was $60,000, and it was worth $250,000 in early 2006 (just before real estate crashed, which is good for you!), your mom's basis would be 50% of $60k, plus 50% of $250k, for a total of $155k.

 

I hope this has answered your question! If you have any more, feel free to ask away!

 

I appreciate the Excellent rating! Yes, I did get paid, thank you very much!

 

Have a great week!

 

Roger

Customer: replied 1 year ago.

Mom worked outside the home very little. "Packing peaches" for 2-3 summers (probably received a W2) and housekeeping (for cash) 1 day a week for maybe 5 years. Would Social Security give me the information on her life time earnings? Or due to the fact she worked very little outside the home negate the need even pursue this? Or should I be prepared ahead of time?



So to summarize it looks like I need to wait for my Realtor to return a CMA (comparable market analysis?). Then determine the long term capital gains amount. Determine what bracket that would put me in (including a small retirement income, a small monthly VA disability and my wife and my social security checks.) On my return I would calculate capital gains rate add it to my other taxes on income and be prepared to pay the total Feb 2014. I want to add my sisters to one of my bank accounts. Then they can write there own check. Or would I run afowl of some other law?

Expert:  taxmanrog replied 1 year ago.

I would think that this minimal work would not make it worth while pursuing it.

You need your realtor to tell you what the CMA was for 2006. As I said, try the tax assessor's office, they should have the FMV, or assessed value, for that time.

The gain reported on Form 8949 as long-term capital gain would be the sales price on Column D, and the basis (arrived at as discussed above) in Column E. The gain would be in Column H. For the Date Acquired column, B, you would use the day your dad passed away.

I don't see any problem with adding your sisters to the bank account.

If you have any more questions, please let me know! It has been a pleasure working with you!

Roger

taxmanrog, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 385
Experience: Licensed CPA, MA, MST with 29 year's experience. Teach Accounting and Tax courses at Masters level.
taxmanrog and 5 other Tax Specialists are ready to help you
Customer: replied 1 year ago.

I've pestered you long enough. Thank you for the education. Allotting another payment to you was only fair for your excellent advice. I now go forward with confidence because you have explained most everything I need to accurately and honestly calculate the tax due (if any). You may close this out. Thank you, Jim.

Expert:  taxmanrog replied 1 year ago.
Jim, I am glad that I was able to help! If you ever have any questions, please feel free to come back and ask for me!

I appreciate the rating as well! Thanks!

Roger

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