How to report sale of property bought from parent for $10?

[mcw317]

Four children bought their Mother's home in 2005 for $10.  She lived there until 2012 then she moved into assisted living until her death in 2019.  The children rented out the property from 2012 until last year when they sold the property for $173,000.  How do we find the cost-basis for the property or do we have to?  Is this considered a gift or inheritance?  Is it capital gains or some other type of income?  Not sure how to report it!

[Anonymous_]

Here is the threshold question:

How have you ("the children") been reporting the rental of the property since 2012? 

If you have not been reporting the rental on Schedule E and taking a depreciation deduction each year, then you need the services of a tax professional.

See https://taxexperts.naea.org/listing/service/individual-tax-preparation

[mcw317]

I have been filing a Schedule E since 2012 but I don't know if the other three have done so.

[Hal_Al]

Yes, you have to determine your cost basis.

You didn't buy the house for $10 ($10 isn't your basis).  You got a gift (gift of equity). 

But, it might be an inheritance, for tax purposes. The usual rule, for a gift, is that the recipient's basis is the giver's basis (what you mother paid for it*). But there is an exception for the gift of her home, where she retained the right to live there ("life estate"). "If you give away an asset and keep a life estate in that asset..... the cost basis of the house is "stepped-up" to the value of the house on date of death [IRC 2036]")

More info: http://www.law.cornell.edu/cfr/text/26/20.2036-1

Any time you spend in a care facility may count as still being in her primary residence if it’s a licensed facility.

You have a complicated situation. You (and your siblings) may want to seek professional tac assistance for filing this year

*If your father was half owner and died before your mother, his half of the basis stepped up on his date of death (in community property states, the whole basis steps up). 

[Anonymous_]

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@mcw317 wrote:

I have been filing a Schedule E since 2012 but I don't know if the other three have done so.

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As @Hal_Al mentioned, you need to determine your basis and the implied life estate (assuming a life estate was not retained in the deed), would give you the best result.

The problem with arguing that this is an implied life estate is that the life tenant has the right to rental income and, if you were collecting, reporting, and retaining the rental income, an implied life estate would be a tough sell.

Regardless, if you used a carryover basis for the purposes on depreciation deductions, your basis would be reduced by the amount of depreciation deductions taken. If you did not take depreciation deductions, when you should have done so, the matter becomes even more complicated. You really do need to consult with a local tax professional either way.