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My two brothers and I were given my mothers home just before…

My two brothers and...

My two brothers and I were given my mothers home just before she died via quitclaim deed. We are trying to decide to keep it or sell it. If we keep it one sibling may take full responsibility of the home and mortgage. Our primary question is of a tax nature in that are we responsible for taxes on the full value of the home when sold split three ways or only the equity after paying the mortgage/debt and realtor fees etc. We understand the quitclaim makes the home now a longterm capital gains investment and applicable tax implications are as such. Also do we then pay our additional income tax rate as we'll as the capital gains rate?

Accountant's Assistant: What state are you in? It matters because laws vary by location.

Florida

Accountant's Assistant: What steps have you taken so far?

We have begun remodeling in preparation for sale but would prefer to keep it. I would be the sibling taking responsibility for the home and allowing another sibling to pay me rent to live there. I am concerned of my tax implications as I am in the highest tax bracket and therefore fall into the 15% capital gains rate. But I don't understand exactly what amount I'd be liable for now or once I sold it in the future.

Accountant's Assistant: Anything else you want the lawyer to know before I connect you?

Its all I can think of for now.

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Answered in 16 minutes by:
3/17/2018
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 32,690
Experience: Taxes, Immigration, Labor Relations
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If the property is sold - the taxable gain is calculated as

(selling price) MINUS (adjusted basis)

.

For gifted property - the basis is the lesser of ()donor's basis and ()FMV at the time of gifting

For inherited property - the basis is FMV at the time the decedent passed away

The property is considered inherited IF that value is included into decedent's estate for estate tax purposes - regardless if there are any estate tax due and regardless if the estate tax return was filed.

Specifically - gifts made within three years before the death are included into the total estate

See here

https://www.law.cornell.edu/uscode/text/26/2035

So if the quitclaim deed was executed within three years - the home is included into the estate - and you may use stepped up basis.

Let me know if you need any help.

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Customer reply replied 1 month ago
Ok so my Taxable gain would selling price minus (Adjusted basis) which is the outstanding debt in the form of the outstanding loan balance correct?

The adjusted basis has NO specific relation to the outstanding debt....

.

For gifted property - the basis is the lesser of ()donor's basis and ()FMV at the time of gifting

For inherited property - the basis is FMV at the time the decedent passed away

.

Then - you will adjust the basis by improvement expenses made after it was inherited or gifted.

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Customer reply replied 1 month ago
if I understand this, it was gifted to us via quitclaim, so the property has a debt of 190k, and your saying that doest matter? Current market value is approx 220k as is, with upgrades we may sell it for $270k so what exactly will be our capital gains tax liability if sold? and is there tax liability if not sold?

The tax liability is based on your TOTAL income, filing status, deductions, etc.

The tax liability is not determined separately for each income you might receive.

If you sell the property - you will realize a gain - and THAT gain is added to your other income.

.

So we are talking about HOW to determine that gain.

The gain = (selling price) MINUS (adjusted basis)

.

So we need to determine your basis

the first step is to classify your translation properly either as a gift or as n inheritance.

That will tells what is your basis. That is what we need to do before moving forward.

Then - you will adjust that basis by adding improvements and selling expenses - that will be your adjusted basis.

.

The loan had no relation in this determination.

When we are taking a loan - that is not taxable,

and when we pay the loan back - that is not deductible.

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Customer reply replied 1 month ago
Ok, now I'm a bit frustrated because I said it was a quitclaim and my research says the feds treat it is a gift and treated now as a longterm capital gain when sold. So does that not give you the info you need? I also provided the FMV as is and with improvements. what else do you need? I'm a $300k plus earner, I'm in the highest tax bracket. I'm trying to determine if I help my brothers and assume the loan and full ownership of the house, how it will affect me once I decide to sell it. It sounds like I'm on the tab for the FULL selling price of the house. Also if sold do I pay both capital gains AND my normal Federal tax rate? Alternatively, my brothers are in the 10-15% tax bracket my research tells me they won't be out capital gains at all if in that tax bracket sounds like I need to quitclaim it to them and let them sell it and keep me out of the equation.

my research says the feds treat it is a gift

For gifted property - the basis is the lesser of ()donor's basis and ()FMV at the time of gifting

So - to determine your basis we need two values

- - your mother's basis - mainly her purchase price

- - FMV at the time a quitclaim deed was executed

Can you verify these values ?

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Customer reply replied 1 month ago
I can get the figures from my realtor but I'm nearly certain my parents purchased the home for approximately $142,000 in 2000. Fair market value Im guessing is the as is market value of approximately $220,000 give or take $10,000 that my realtor came up with shortly after my mothers passing approximately 3 weeks ago. That last answer made sense to me and helps a great deal now. only question is, upon selling, I'll be hit with the current 15% capital gains from the BASIS, and then do I get hit double jeopardy on my personal taxes at my current tax rate on the same BASIS? That would result in nearly 50% tax liability.
Customer reply replied 1 month ago
One last thing, is this tax only due when we sell or are we taxed on it this year by simply being gifted the property?

So far - your basis for gifted property

is the lesser of ()donor's basis $142,000 and ()FMV at the time of gifting $220,000

So that will be $142,000.

You will add improvement expenses paid after that - and expected selling expenses - I assume $30k

so your adjusted basis woudl be $172k

You may correct these amount with your actual values

.

Based on these assumptions

Your expected gain = $270k (selling price) MINUS $172k(adjusted basis) = ~$100k.

.

In your income level $300k - your estimated income tax liability is ~$77k

With additional long term capital gain $100k - it will be ~$95k - or $18k in additional federal tax liability ;

These are rough estimations.

If you own 1/3 - you will be responsible of 1/3 of the gain.

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Customer reply replied 1 month ago
OK thank you, ***** ***** a start in clearing things up.

If you still have any doubts, need clarification - please be sure to ask.

I am here to help you with all Social Security / Tax related issues.

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Customer reply replied 1 month ago
if your able, do we get hit with both capital gains and normal personal tax rate? or just the capital gains rate?

There is no separate capital gains tax in the US....

That is unfortunately a common misunderstanding...

WE have INCOME tax - but long term capital gains are taxed at REDUCED long term capital gain rates.

That is not in additional but INSTEAD of regular tax rates.

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Customer reply replied 1 month ago
Ok thanks for the clarification. My research on Quitclaim Deeds says the Federal Government looks at the transaction resulting from a Quitclaim Deed as gift and falls under Long Term Capital Gains. So just to clarify, We should only be looking at current capital gains tax liability and it is currently, under new law, 15%.

The new tax law did not make changes for long term capital gain rates.

They are same as before - depending on income - zero percent, 15% and 20%

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Customer reply replied 1 month ago
Ok thanks, I'm looking them up now to see how it will effect my brothers and I. Thank you.

I appreciate if you take a moment to rate the answer.

Experts are ONLY credited when answers are rated positively.If you still have any doubts, need clarification - please be sure to ask.I am here to help you with all Social Security / Tax related issues.
Lev
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Category: Tax
Satisfied Customers: 32,690
Experience: Taxes, Immigration, Labor Relations
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