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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28084
Experience:  Taxes, Immigration, Labor Relations
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Complicated question... Grandma & Grandpa's home was sold

Customer Question

Complicated question... Grandma & Grandpa's home was sold for 145,000 has been vacant for 10 years., it was never used as a rental. There are 7 beneficiaries check at closing was made to 2 of the 7, have not cashed it (all seniors 4 lower income 3 in higher).
Does the 2 have to claim the entire sale?
Does it have to fall under inheritance tax?
Could they gift it to the other beneficiaries?
If you receive a gift do you claim the income?
What is the best way to report the sale?
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

Several issues..Z
1.

As the property was inherited - we need to determine the basis as the fair market value at the time the decedent past away.
You might have some improvement expenses over the time after it was inherited - so add these to the basis - and that will be your adjusted basis.
2.
The gain is calculated as 145,000(sale price ) MINUS (adjusted basis ) MINUS (selling expenses - Realtor fees, inspections, etc)
That gain will be taxable. Whoever is listed on the title as co-owner will need to report his/her share of the sale transaction - and will realize a share of the gain.
Depending on individual circumstances - that gain might be taxable or not based on the total income, filing status, deductions, etc.

3.

I am not sure why the check is issued only to some co-owners - but that generally doesn't change the tax treatment - each co-owner will need to report his/her share.
4.

There is no federal estate tax on small estates - and there is no federal inheritance tax.
The Colorado estate tax does not apply to decedents whose date of death is on or after Jan. 1, 2005.
So - if there were any estate tax liability - that must be handled at the time the decedent passed away.

5.
For income tax purposes - inheritance is not a taxable income.

There is no any amount limit. It does not matter how the gift is transferred - as long as that is a gift - there is NO tax liability.

Please see for reference IRS publication 525 -

http://www.irs.gov/pub/irs-pdf/p525.pdf

Gifts and inheritances. In most cases, property you receive as a gift, bequest, or inheritance is not included in your income. However, if property you receive this way later produces income such as interest, dividends, or rents, that income is taxable to you.
6.

Every person may gift assets that he/she owns. So if you receive an inheritance and AFTER that decided to gift to any other person - you may do that.
As a donor - you might be responsible for gift taxes - that is different from income tax.

A gift up to $14000 per person per year is NOT taxable and is not reported.

If you gift is more than $14000 to any single person - you would be required to file a gift tax return - from 709.

However - there would not be any gift tax liability as long as you do not reach the lifetime limit of $5,430,000 (for 2015)

7.

There is no "best" way to report. the sale transaction is reported on form 8949 - and the gain is calculated there and transferred to schedule D .

If you realize either a gain or loss - that amount is transferred to form 1040 line 13 and added to your other taxable income.

Any questions? I am here to help you.

Customer: replied 1 year ago.
OK, so really all that matters is the tax bracket the 2 that the sale is being reported under. One doesn't not have to file a return the other I think is in 15% bracket. Now the tax bases...
The grandpa died in 1998, and the grandma died in 2013 deed went into beneficiaries name name in 2005 but realistically didn't inherit until grandmas death in 2005. They could either consider the inheritance in 2005 or at death in 2013, which would be the better tax bases. Value in in 2005 was about 60,000 and 2013 about 110,000.
Expert:  Lev replied 1 year ago.

Assets are inherited if the ownership is transferred because of the death of the original owner.
If the title is transferred BEFORE the original owner passed away - that is not an inheritance - but a gift - we need to be clear of that.
Regarding the tax basis - stepped up basis is applied to inherited assets only - that means if assets are included into decedent's estate for estate tax purposes (regardless if the estate tax return was filed or not) - such assets get stepped up basis.
The stepped up basis is determined as a fair market value on the date when the decedent passed away.
It doesn't matter when the property title was actually transferred - but the matter is the reason why it was transferred.
So - just for illustration - if the property owned jointly by your grandfather and your grandmother - and the grandfather died in 1998 - your grandmother inherited a half of the property and her stepped up basis is the fair market value of that half.
On the other half that she assumed as owned - her basis was the original purchase price.

Customer: replied 1 year ago.
What we are trying to determine is the gains taxes that are going to be charged, so they can all 7 can pay for the gain. The grandma's intention was for the home to be inherited by the beneficiaries upon her death, they transferred it because of her inability to to pay her property taxes and just wanted to make sure it was all taken care of. Their was no will or estate to speak of. The value upon her death was about 90k-110,000 bought in 1929 for 600.00. The cost to sell was 23,061.00 off the 145,000. Joe makes 32k in social security and Martha about 45k...
Expert:  Lev replied 1 year ago.

I clear understand the intention of your grandmother to get rid of the property that she could not afford - but if she choose to transfer the title while she was alive - that is a gift - and may not be considered as inherited regardless of her intention.
I assume - she applied for Medicaid and reported that she owned no assets - correct?

The property was not included into your grandmother's estate - so it was not transferred because of her death - and there is NO stepped basis.
The only stepped up basis - based on your information - is applied to the half of the property when your grandmother inherited it from the grandfather in 1998.
In additional - you will need to adjusted the basis by all improvement expenses - so actual basis will be higher.
Selling costs will also be added to the adjusted basis.

Customer: replied 1 year ago.
If the 2 gift the proceeds to the other beneficiaries do they the main 2 get taxed for gifting?
Expert:  Lev replied 1 year ago.

In the US - gift - is not taxable income for the recipient and you do not need to report it on the tax return.There is no any amount limit.
It does not matter how the gift is transferred - as long as that is a gift - there is NO income tax liability.
Please see for reference IRS publication 525 -
http://www.irs.gov/pub/irs-pdf/p525.pdf
Gifts and inheritances. In most cases, property you receive as a gift, bequest, or inheritance is not included in your income. However, if property you receive this way later produces income such as interest, dividends, or rents, that income is taxable to you..
.
On the other hand - the donor may NOT deduct teh gift on hus/her tax return.
Only gifts to charitable organizations may be deducted.
Gifts to specific persons are never deducted.

.

Another issue with gift tax...
Regarding your situation - if the donor (gifter) is an US person - the gift is reported on the gift tax return. The gift below $14,000 is not taxable gift but when the gift is above that threshold - it is reported on the gift tax return - form 709.
Regardless - there will NOT be any gift tax liability as long as the lifetime limit is reached - that limit is $5,430,000 for 2015.