Capital Gains on house left to father after mother passed

[jameswc]

When my mom passed away in 2019, she willed the house in NJ to my father who was not on the deed.  My mom inherited the house from her parents in 1987.  My father passed away in 2020, but never had the house re-deeded over to him.  The house is now about to hit the market.  I am now the executor on both estates.  Do I need to do anything in order to avoid capital gains from the 1987 value of the house to the 2020 value?  When selling the house, do I need to have the seller of the house listed as my mother's or father's estate?  Thank you in advance for any assistance.

[tagteam]

I am very sorry for the loss of your mom and father.

You should check with an attorney in your state (New Jersey).

See https://www.avvo.com

In most, if not all, states, delivery of the deed (and presumed acceptance) is essential for a valid transfer (recording of the deed is a mere formality). Regardless, a valid will devising the property would typically take precedence and be effective for a valid transfer.

In this instance, actual delivery of the deed should relate back to the date of your mom's death (when the will would have taken effect). In that case, your father's basis would be the fair market value on the date of your mother's death in 2019 (plus any improvements made after her death). Your basis would, regardless, would be the fair market value on the date of death of your father.

However, you should absolutely check with a local attorney with respect to this matter.

[Opus 17]

I don't want to sound like a cop-out, but this is one of those "see a lawyer" questions.  Or a tax professional.

I think your question is irrelevant.  When your father died, the ownership of the house passes to his estate, which is a separate legal entity.  The estate needs to file its own tax return for any income received by the estate, such as the sale of the home, or pension payments and business income received after the date of death.  The estate passes the proceeds to the heirs.  Now, I'm pretty sure the estate gets the house with a stepped-up basis equal to the FMV on the date your father died, which means neither the estate nor the heirs will owe capital gains tax after the house is sold and the proceeds passed to the heirs, unless you sell at a profit relative to the date your father died.

In other words, you don't need to do any calculations about what your father's cost basis was, because the estate gets a stepped-up basis.  

I don't think the fact that your father never recorded the deed, changes the fact that he owned the home and it passed to his estate. 

[tagteam]

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@Opus 17 wrote:

When your father died, the ownership of the house passes to his estate, which is a separate legal entity. 

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That depends upon state law. In some states, ownership passes directly to the heirs or devisees and, regardless, the property gets a stepped up basis assuming the property is included in the decedent's gross estate.

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@Opus 17 wrote:

I don't think the fact that your father never recorded the deed, changes the fact that he owned the home and it passed to his estate. 

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Recordation does nothing more than provide "record" notice to (potential) purchasers and others; it is a mere formality and generally would not have an adverse impact on an otherwise valid transfer.

[jameswc]

Thank you for your response.  Wouldn't my father's estate's basis be the fair market value at the date of his death then?

[Opus 17]

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@jameswc wrote:

Thank you for your response.  Wouldn't my father's estate's basis be the fair market value at the date of his death then?

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Yes, that's what I said.  If the house passed to the estate, or if it passed directly to the heirs, the estate or heirs get a stepped up basis which is the FMV on the date of your father's death.  So you don't have to worry about what your father's basis might have been based on earlier events. 

[tagteam]

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@jameswc wrote:

Wouldn't my father's estate's basis be the fair market value at the date of his death then?

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Yes, the basis of the property would be the fair market value on the date of your father's death, whether the property was acquired by the estate or passed directly to you. [I.R.C. § 1014]