@crk1949 wrote:
Also, what if the Quit Claim Deed was never filed. What if it was just filled out and signed by my father but he never filed it with the county. Would it have to be used for taxes or just we just claim the inheritance and his time of death?
You need an attorney. There are two key legal questions that must be answered before we can explain your tax position.
1. Is an unfiled deed legally binding? This will depend on the laws of your state. If the deed is legally binding, but you decide to pretend it does not exist to gain a tax advantage, that's a serious case of tax fraud.
2. Was the transfer in fee simple, as joint tenants, or with a life estate? A life estate means that the siblings could not sell the home until their father died. If the deed was in fee simple or as joint tenants, then it would have been possible for the siblings to sell their shares of the home to a stranger without the father's permission, and kick him out of the home. (Even though you would never do this, the legal ability to do it if you wanted to is vitally important here.)
Now, here are three possible tax situations in brief.
1. The deed is not legally binding. Your father owned 100% of the home when he died. The home passes through the estate, and goes to his legal heirs based on a will or the intestacy laws of your state. Assuming you and your sister each inherit 50% of the home, you also receive a stepped up basis equal to the fair market value on the date your father died. The only part of the sales proceeds that would be taxable would be the increase in value since the day he died.
2. The deed is binding and your father had a life estate. Because you could not sell as long as your father was alive without his permission, the IRS views you were not actually given anything of value. You and your sister inherited the house with a stepped up basis, and the capital gains treatment is the same as in #1.
3. The deed is binding and was in fee simple as joint tenants. You and your sister were each given 1/3 of the home. You also received your father's cost basis at the time.** Then when your father died, each sister received an additional 1/6 of the home (their father's share) with a stepped up cost basis. However, your current overall cost basis is likely to be much less than the value of the home, and a large portion of the sales proceeds will be considered taxable capital gains.
**To calculate your father's cost basis on the date of the gift, you would need to know the price he originally paid, the cost of any permanent improvements made to the property, and any depreciation taken for business use. If he co-owned the property with a spouse who died before he did, you would need to know the fair market value of the property on the day his spouse died, as well as whether this property is located in a community property state or not. You will need to make diligent efforts to investigate and properly document his cost basis. If you are audited and can't prove his cost basis, the IRS may determine that the entire proceeds are subject to capital gains tax.
