Inherited second home

[cstein64]

Hi - we sold our parents home LY. It was never rented, it was their primary residence, but it was in the kids names for less than a year. 

The property was in NY state, but we live in FL.  When the property was sold, we had to write a check to the state of NY for $12K. 

2 questions, we have to report it as capital gains - correct? And FL doesn't have state taxes, we don't live in NY. Can we get the taxes back from NY to apply that money to the actual capital gains taxes owed??

TY for any answers..

[Anonymous_ · Accepted solution]

You might want to consult with a local tax professional.

See https://taxexperts.naea.org/listing/service/estates-gifts-trusts

Since the home was your parents' primary residence and they resided in that home until they passed (presumably), then you and your siblings may be able to make an argument that your parents retained a life estate while you and your siblings received a remainder interest.

See https://www.law.cornell.edu/cfr/text/26/20.2036-1

The foregoing would provide you and your siblings with the best tax treatment as your basis in the home would be stepped up to its fair market value on the date of death of the last parent to die.

With respect to the taxes paid to NY, what was the nature of those taxes? Transfer taxes or otherwise?

[AmyC]

1. The house was in the kids names. Did this happen before of after death as that changes your basis in the house. If before they passed, they gave you a gift plus some inheritance. If after, your basis is your share on the date of death.

Example for kids on title before death:

• Mom and Dad bought the house in 2000 for $200,000.
• Along the way they added  2 kids names to the title.
• Each kid has a basis of 25% of the house or $50,000. Since 4 people are on the title now.
• Mom and Dad pass in 2022, house worth $400,000.
• Parents share was 50% or $200,000 to split between the kids.
• Kids now have $150,000 basis each in the house. Original plus inherited.
• If they passed farther apart than 6 months, you should evaluate for each death. See Publication 551 (12/2022), Basis of Assets - IRS

2. The property was in NY. Therefore, NY gets to tax the income. When you file your NY tax return, you may owe or have a refund. 

3. Yes, you will report the sale of the house as capital gains and it is long term due to inheritance - which is always long term.

4. If you get a refund from NY, you can use the money however you would like.

[Anonymous_]

The example stated is why you want life estate treatment for this @cstein64 (either expressed in the deed or implied).

Parallel Example (with LE):

• Mom and Dad bought the house in 2000 for $200,000.
• Sometime subsequent, they add 2 kids to title (with life estate retained or implied).
• Mom and Dad pass in 2022, house has a fair market value of $400,000 on the date of last to die.
• Kids now have $200,000 basis each in the house (FMV on the date of last parent to die).

[cstein64]

Hi and thank you for the answers...

A little more background. 

The house was in a living trust. It was quick deeded over to the kids prior to passing. One parent is still alive the other deceased after the transfer. We worked with an elder law group that specializes in Medicaid.

The NY state taxes were state income taxes on the sale of the house.  $223K split 2 ways all profit as the house was paid off. So is it technically inheritance? 

I guess i need to file a NY state tax return?? The real estate lawyer in NY insisted that it was paid up front as we live in FL.

[Vanessa A]

No, it is not an inheritance if the deed was transferred prior to their death, it would be considered a gift.  You have a gain on this sale, so your basis in the house would be the same as your parents since the house was bought for $200,000 and sold for $223,000.  If you had a loss, then you would have used the FMV at the time of the gift transfer. 

Since the profit was split in half, the basis would also be split in half.  So on your return, you would report $100k as your basis and $111,500 as your selling price.  Then if there were any selling expenses you would divide them as well. 

There is no special reporting for you on the gift other than the sale.  You will report the sale by selecting the following:

• Federal
• Income
• Show More next to Investment Income
• Start next to Stocks, Cryptocurrency, Mutual Funds, Bonds, Other (1099-B) 
• Select Other
• Continue through and select Other again for the type of investment
• Answer how you obtained the house (gift)
• You will need to enter the selling price, dates and the cost basis of the items

Yes, you will need to file a NY non-resident return to report the sale of the house. If taxes were withheld, this again would be split reporting on your returns.