Capital Gain(?)

[richarpr]

In 3/2004 a Deed for a property lot was recorded: "hereby GRANT(S) to Owner#1, Owner#2, and Owner#3 all as Joint Tenants".  The lot was purchased by Owner#1 for $32,500.  I am Owner#3 and paid nothing from 2004 to date.  In 2016 Owner#2 passed away.  In mid 2021 Owner#1 passed away.  In late 2021 I attached Affidavit of Death for both Owner#1 and Owner#2 to the Deed.  I sold the lot 2/2022 for $48,500 as I have no use for it.  I'm assuming this is a Capital Gain for me, and since I was technically an "Owner" from the start but didn't pay anything - I don't have any Cost Basis.  So, my "gain" doesn't have any offset and would be the full $48,500 ?  As you can probably tell, I'm not particularly financially savvy and am looking for advice on this topic.  Thanks.

[tagteam · Accepted solution]

Any capital gain you have would be long-term capital gain (obviously).

You have a basis, but it is complicated. It appears as if you received a gift of a one-third interest from Owner #1 and, in that event, you would have a carryover basis (e.g., one-third of Owner #3's adjusted basis).

When Owner #2 passed in 2016, you and Owner #3 acquired Owner #2's one-third interest (one-sixth each), the basis of which would be the fair market value on Owner #2's date of death. You and Owner #3 each had a one-half share following Owner #2's death. 

When Owner #3 passed in 2021, you acquired the remaining one-half interest, the basis of which would be the fair market value on the date of Owner #3's death. You would then, typically, own the entire fee in severalty (i.e., you were then the sole owner).

You can clearly see that this is complex and would require determining the fair market value on two dates in order to determine your exact basis. Since the sales price is relatively low, you could consider doing some research yourself into the values on those dates.

[AmyC]

I agree with tagteam that it appears that you have a gift in the purchase, 1/3 of the purchase price, $10,833.33.

I am assuming JTROS since nobody else comes into play when someone passes. This means, when owner #2 passed in 2016, you and owner #1 split the value on inherited date. For example, if the property was worth $39,000 then you and owner #1 would each increase your basis by a third, $13,000.

In 2021, owner #1 passes, you inherit the rest of the property at the value on that date. For example, if the property was worth $44,000, then you would inherit 50% of the value, $22,000.

Check into the values and get the correct numbers for date of death for the other owners.

If others inherited, that changes the rules. 

[richarpr]

Thanks for taking the time to look this over.  After verifying the Deed was "Joint Tenancy" and then doing some searches, I think I'm following a little bit.

[richarpr]

Thanks for taking the time to look this over.  After verifying the Deed was "Joint Tenancy" and then doing some searches, I think I'm following a little bit.  The inclusion of some numerical examples is most helpful (and quite close).  I'm OK until the last part where it appears my Basis would increase by 50% of the 2021 land value.  If these sample values are added for my total cost basis - they're very nearly equal to the sale price.  Not that I would complain, but it seems a bit odd for being "handed" almost $50k and only being responsible for a miniscule capital gain after paying nothing for the property.  Or more likely, I'm still not comprehending the process yet and how it fits with 8949.

[tagteam]

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@richarpr wrote:

....it seems a bit odd for being "handed" almost $50k and only being responsible for a miniscule capital gain after paying nothing for the property. 

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Yet, that is the way the basis rules work in your scenario.

You started with a carryover basis of $10,833.33 and each successive interest you acquired from one of the joint tenants was stepped up to its fair market value on the dates of their deaths. 

[AmyC]

As the last owner standing, inflation in real estate and selling soon after the final inheritance, I am not surprised. After taking off the expenses of selling, you could even have a loss. A small gain is great. It is a capital gain on sch D so it may not even be taxed, depending on your income.

From Topic No. 409 Capital Gains and Losses - IRS

The tax rate on most net capital gain is no higher than 15% for most individuals.

Some or all net capital gain may be taxed at 0% if your taxable income is less than or equal to $41,675 for single and married filing separately, $83,350 for married filing jointly or qualifying surviving spouse or $55,800 for head of household.

A capital gain rate of 15% applies if your taxable income is more than $41,675 but less than or equal to $459,750 for single; more than $83,350 but less than or equal to $517,200 for married filing jointly or qualifying surviving spouse; more than $55,800 but less than or equal to $488,500 for head of household or more than $41,675 but less than or equal to $258,600 for married filing separately.

Glad I could help!