Gifted Home

[Rshc]

My parents had their house and put my oldest brother on the deed in case anything happened to them.  I was too young and a minor at the time this took place so I was never added to the deed.  Once our father passed away, my oldest brother became full owner.  We decided to sell last year and my oldest brother added me to the deed on 05/16/2022 so that I could get half of the money and we sold the house on 06/01/2022.  I only got a 1099-S with Gross proceeds of $200,000.  I am not sure if this would be considered a long term or short term transaction?  Not sure how I would go about in reporting this on my tax returns.  

[Mike9241]

When your parents put your brother's name on the deed that in effect made a gift to him of 1/3 of the house. his basis in this portion would be 1/3 of their basis. When your mother passed I'm assuming (this could be totally incorrect because you provided no information about this event) he inherited 1/2 of his mother's interest with your father inheriting the other 1/2. for this portion of his interest, 1/6  of the total, he would get a tax basis of 1/6 of the total fair market value of the property on that date. When your father passed he inherited the remaining 1/2 (based on the previous assumption of what happened when your mother passed). his tax basis in this portion is would be 1/2 of the total fair market value on that date. so hos total basis would be the sum of:

a) 1/3 your parents' basis +

b) 1/6 of fair market value when mother passed +

c) 1/2 of the fair market value when father passed

he made you a gift of 1/2 of his interest (should have filed a gift tax return). so you get 1/2  of his basis as your basis and his holding period is your holding period.  to make reporting the sale easier I would use inherited as the date acquired. this will make any gain long-term,  Another item you provided no info about was whether or mot this was your principal residence.  generally, a taxpayer can take a home sale exclusion if they OWN and OCCUPY the property as their principal residence for any 2 years in 5 years before the sale.  it's easy for you to determine whether you meet the occupancy test. The harder part is your period of ownership. I would say technically you did not own the property under your brother gifted it to you so you would not qualify for the home sale exclusion if this was your principal residence. 

[Rshc]

Thank you for the information.  My mother was never in the picture.  My father was the only one who lived in the house.  I never lived in the house either.  So if I put down it was inherited, it qualifies as a long term?  Can I deduct any improvements made to the house by my father?  Can I deduct closing costs from the profit I made?

[TomD8]

You have a complicated tax situation and I suggest you consult a local tax professional.  You did not inherit your share in the property; you received it as a gift - from your brother who himself had received it as a gift.  This IRS Q&A will give you an idea of the complexities involved in calculating the cost basis of gifted property:

https://www.irs.gov/faqs/capital-gains-losses-and-sale-of-home/property-basis-sale-of-home-etc/prope...

You need to determine the cost basis of your share so that you can pay the correct amount of capital gains tax.

[Hal_Al]

It's complicated and professional help (maybe even a tax attorney) may be warranted.

Although you have effectively inherited half a house, it's not clear if that's what legally happened. If your father retained a right to live there ("life estate") when he put you brother in the deed, it is usually treated as inherited. if you are a named testamentary beneficiary of the will, it would support that position. 

Assuming it qualifies as inherited:

Q. Can I deduct any improvements made to the house by my father? 

A.  No. The  cost basis, in an inherited property is  the fair market value on the date of death (your cost basis would be half that), not you father's cost basis,  as in the case of a gift.

Q. Can I deduct closing costs from the profit I made?

A.  Yes.  With the stepped up cost basis, you may even have a loss.  You may deduct the loss, if the property is treated as investment property instead of personal use property. It is personal use property if you, or any family member used it as a residence after your father died. 

[TomD8]

@Hal_Al has a good point.  If your brother acquired the house as the remainderman in a life estate deed, he would receive a "step-up" in his cost basis to the property's FMV at the time of the father's passing.  A step-up in basis could be very beneficial tax-wise.  

[Rshc]

My brother would be the only one who could potentially qualify as a step-up and not me correct?

[RobertB4444]

You also get the step-up because your brother is gifting you half of the house and his basis transfers to you.  Look at @Mike9241 's answer above to see the math for that.

@Rshc