PennyJ
New Member

Deductions & credits

Hello RyanH,

Thanks for your question about capital gains taxes on your parents’ home.  First, let me apologize for the length of this answer, but I hope I have provided you with the information you need.

Based on the information you provided, you will be subject to capital gains tax on the home when you sell it.  However, the amount of gain may not be as much as you think. 

The taxable gain will be the sales price less your adjusted basis in the house.  The house is considered a gift to you from your father; therefore, your initial basis is the lesser of:

  •      the fair market value at the time of the gift
  •      the adjusted basis that your father had in the home at the time of the gift

It appears that the adjusted basis of your father would be the lesser amount, so let’s discuss the components of his basis.  If your parents owned the home as “tenants by the entirety” or “joint tenants with right of survivorship”; your father’s basis will include both his share of the basis and the basis inherited from your mother.  Therefore, his adjusted basis is composed of:

  •     50% of the original purchase price, plus 50% of improvements and other increases to basis, less 50% of decreases to basis (see image below)
  •     50% of the fair market value of the home on the date of your mother’s death
  •     Plus any increases or decreases in the basis after your mother death

Your basis would then be your father’s adjusted basis at the time of the gift.

I know this appears rather complicated, so let me provide an example.

Example:  Let’s assume that your parents paid $50,000 for the house.  Over the years, they made various improvements to the home that totaled $70,000 bringing the adjusted basis to $120,000.  (There were no other increases or decreases in basis as outlined in the image below.)  At your mother’s death, the fair market value of the home was $200,000.

Your father’s adjusted basis would now be $160,000, a total of:

  •      $60,000 (50% of purchase price plus improvements)
  •      $100,000 (50% of the fair market value at your mother’s death)

If your father made an additional improvement to the home of $10,000 before giving it to you, his adjusted basis would now be $170,000.

At the time of the gift, the fair market value of the home is $210,000.  Since his adjusted basis of $170,000 is less than the fair market value of $210,000, your basis in the home would be $170,000.

Your basis will be the starting point of determining the gain when you sell the home.  Any improvements you make will increase the basis.  The selling price less your adjusted basis will be the taxable gain. 

In addition, capital gains are currently taxed at a lower rate than regular income.  As tax laws change, this may or may not be true when you sell the home.

As far as the part of your question regarding the house being sheltered from Medicare, I am unable to address that.  I recommend that you consult with an attorney that specializes in Medicare issues if your have any questions.

I hope you find this answer helpful.  If you have additional questions or comments regarding this issue, please feel free to reply to this post for further clarification.

Thanks for trusting TurboTax with your tax preparation!