Three siblings (Peter, Joe and Mary) are trying to understand the tax implications regarding a third-party sale of our family home which we inherited equally (1/3 each) upon our mother’s death on December 23, 2020.
ASSUMPTIONS: For sake of simplicity to understand our tax liability, assume the following:
- The mortgage was fully paid before our mother’s death.
- Mary lived in the home from 11/2019-10/2022 and has been the primary caretaker.
- Joe and Peter live out-of-state. Joe is the executor of our mother’s estate.
- Assume FMV at the time of death = $450k ($150k per share)
- Assume FMV of the home July 2023 $525k ($175k per share)
- We made $15k ($5k per share) capital improvements between January 2021 to July 2023
- Each sibling’s adjusted basis = $155k ($150k + $5k capital improvements)
- Each sibling’s capital gain upon sale = ($525k - $465k) = $60 total gain/3 = $20k each
- Joe wishes to gift his entire share to Mary; Peter intends to give $50k of his after-tax proceeds to Mary.
How should Peter handle his $50k gift? Should he recognize it as a loss $175k - $50k gift = $125k net proceeds versus his $155k adjusted basis, or should he handle this as two transactions: $175k - $155k adjusted basis = $20k capital gain. Then a second unrelated transaction giving Mary $50k as a gift?
