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Richard, Tax Attorney
Category: Tax
Satisfied Customers: 55294
Experience:  29 years of experience as a tax, real estate, and business attorney.
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My wife was gifted her moms house in 1994. Her mom just recently

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My wife was gifted her moms house in 1994. Her mom just recently passed away after continuing to live in this house until July of this year. My wife basically paid all her moms bills and let her mom live there for free, because she was receiving social security disability and couldnt manage her own money. Now that her mom has passed away, what are the best options to avoid the most tax? Can my wife gift it to me? Should we just sell it? should we rent it?? what options are best?
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Can you give me a bit more information on the house? Do you have any idea how much her mother pay for the house? Have any improvements been made to the house since her mom purchased the house? How much is the house worth today? I'm presuming there is no mortgage on the that correct? If you were to rent it, how much would the rent likely be? Thanks.
Customer: replied 3 years ago.

Her mom got a divorce from her husband in 1990 i believe, and my wifes moms husband passed away in 1994. They bought the house as a couple i believe in 1959 or 1960. we have made improvements to the house over the course of the past 20 years while her mom continued to live there yes. we paid all repairs, taxes, etc..estimate of repairs/improvements is probably 20k or more. house needs a lot of interior work and has just been gutted of all her moms stuff, and carpets due to cat odor. sell as is maybe like 100k, fix it up and sell fair market probably 155k. there is no mortgage, correct. if we were to rent, after putting money into the house to make it "rentable" (over 10k), we could get 1100 per month. my wife was the executor of the estate, but she basically had no worth when she passed away, as all her house goods were "hoarder" type junk, and my wife paid all her bills/food, etc with her mom SSI benefits and allowed her to keep living there.

Thank you for following up. There would be no tax on the gift, and since the property was already gifted to your wife, there is no tax related to the house upon her mother's death.

If she were to gift the house, there would be no tax. If you make a gift to a spouse, there is an unlimited gift exemption. A gift to anyone else would also result in no tax. New York does not have a gift tax. And, on the Federal level, eecipients of gifts are not subject to gift tax. And, there should also be no gift tax due from the donor. Each donor can give $14,000 per year per person under the annual gift exclusion. In addition to that, for any amounts in excess of the $14,000 in a year, each person has a $5,250,000 lifetime exemption....which means a person can give a cumulative amount of up to $5,250,000 in gifts over and above the $14,000 annual gift exclusion amount without incurring gift tax....the donor must file a gift tax return to let the IRS know how much of the lifetime exemption is being used, but there will be no gift tax until cumulative additional gifts have exceeded the $5,250,000.

If you sell the house, because it was gifted during your mother's life, the basis of the property would be her mother's purchase price plus all improvements made by mother and by you guys. You would have long term capital gain equal to the sale price (less closing costs) in excess of your basis. For 2013, the tax laws concerning taxation of long term capital gains are as follows:

0% applies to long-term gains and dividend income if a person is in the 10% and 15% tax brackets,
15% applies to long-term gains and dividend income if a person is in the 25%, 28%, 33%, or 35% tax brackets, and
20% applies to long-term gains and dividend income if a person is in the 39.6% tax bracket.

In addition, starting in 2013, capital gain income will be subject to an additional 3.8% Medicare tax for taxpayers with income at or above a certain threshold. This 3.8% Medicare surtax applies to taxpayers with “net investment income” in excess of threshold income amounts of $200,000 for single filers and $250,000 for married couples filing jointly.

If you rent the property, you would pay tax only on the net income. Thus, the $1100/month would be reduced by property taxes, insurance, repairs, HOA fees, and other expenses related to the maintenance of the property and renting the property. You would also get to reduce the income by deprecation of the basis of the improvements (the basis of the land would have to be excluded from the overall basis)..which is a non-cash outlay. Thus, you would only incur tax on the net amount you end with.

Under my terms of service, I'm only allowed to communicate through this forum, but you have a Share button on the bottom right of your original question box, and if you hover over it with your mouse, one of the options is email. So, I have provided the form below. Also, you can block, copy and paste the form I've provided below. I'm sorry about the extra trouble for you!

Customer: replied 3 years ago.

So, end incur the most profit and least amt of tax owed on this unfortunate situation, what would be your best advice given the whole ball of wax and circumstances?

It would depend upon what you consider the appreciation of the property to be in 5 or 10 years. If you think it will appreciate, I would rent it...with the expenses and depreciation offsetting most of the rent...and then sell it when the value goes up in the future. If you don't think it's likely to appreciate, I would sell it now and pay the long term capital gain so you don't have to worry about it. Rental property is really not worth the effort if you are not in the rental business unless you think the property is going to appreciate greatly and you want the income to cover the costs while waiting for the appreciation.
Customer: replied 3 years ago.

I'm not sure how we would even start to try and figure out a tax basis on the house purchased in 1959? So basically we should sell it i think, just wondering if it's worth putting $$ into it before selling, or selling as is as a fixer upper at this point. Thank you for your specific and helpful responses!!

Given your facts, I would sell it. And it depends upon the neighborhood, but if it's a decent neighborhood, generally it makes sense to fix it up, but only if it's not in a tear-down neighborhood. If all the value is in the land and everyone is buying to build new homes, then don't spend a dime on it because the buyer is simply going to tear it down anyway in all likelihood.

You're's been my pleasure! Have a great Sunday!
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