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crk1949
Level 2

sale of home

My father recently died. He filed a Quit Claim deed on the property several years ago naming himself, my sister and I as owners of the property.  We are looking to sell the property soon and are wondering what the process is regarding Federal taxes. 

10 Replies
Carl
Level 15

sale of home

He filed a Quit Claim deed on the property several years ago naming himself, my sister and I as owners of the property.

Can you clarify the above?  If he filed a QC on the property, that would most likely be to "remove" himself as an owner of the property. But it very well could be that he retained his ownership and just added you and sis as owners. Yes, this does have an impact on taxes - and not a good one either.

 

tagteam
Level 15

sale of home

I am sorry for your loss. You probably need to post a few more details regarding the transfer (gift) and how you are using the property (or how the property has been used).

 

If your father named himself as a grantee on the quitclaim deed and also you and your sister, it appears as if you each owned a one-third interest in the home.

 

When your father passed, you and your sister likely acquired your father's one-third either through inheritance or operation of law (depending on the type of ownership specified in the deed). As a result, the basis of the one-third you and your sister acquired as a result of your father's passing would be stepped up to its fair market value on the date of his death. 

 

The one-third you and your sister acquired at the time of the quitclaim deed (the conveyance) would have a carryover basis from your father's ownership (i.e., you and your sister would take your father's basis).

 

 

 

Note that if you or your sister owned and used the home as your main home, you may be able to exclude part or all of any gain as a result of the sale.

 

See https://www.irs.gov/taxtopics/tc701

 

It could also be the case where you and your sister were remaindermen and your father retained an implied life estate for himself. In that event, you and your sister would receive a basis stepped up to the fair market value for 100% of your interests in the property on the date of your father's passing.

rjs
Level 15
Level 15

sale of home

You haven't given anywhere near enough detail. The tax situation is going to be a little complicated. tagteam is making a lot of assumptions, which may or may not be correct. I don't think we can properly evaluate your situation here. I suggest that you consult both a lawyer and a tax professional to determine how the sale of the home is going to be taxed. Bring the lawyer and the tax pro copies of the deed and your father's will. The lawyer and the tax pro will tell you if you need any additional documents or information.

 

crk1949
Level 2

sale of home

Yes, he named himself, me and my sisters as the owners on the quit claim deed.

crk1949
Level 2

sale of home

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?

tagteam
Level 15

sale of home


@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 should seriously consider an in-person consultation with a local attorney.

 

See https://www.avvo.com/estate-planning-lawyer.html

 

In many, if not most (or even all) jurisdictions, recordation is a mere formality (it provides record notice to future purchasers of property interests) and does not impact an otherwise valid conveyance, which only entails delivery (actual or constructive) of the deed and acceptance.

rjs
Level 15
Level 15

sale of home

@crk1949  If the attorney says that the unfiled deed did transfer partial ownership to you and your sister, ask the attorney whether your father reserved a life estate, or whether he retained an implied or de facto life estate. It will make a huge difference in the amount of tax you have to pay when you sell the house.

 

Opus 17
Level 15

sale of home


@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. 

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
tagteam
Level 15

sale of home


@Opus 17 wrote:
2. Was the transfer in fee simple, as joint tenants, or with a life estate? 

Those are actually additional scenarios, which is why an attorney is absolutely necessary in this instance.

 

For example, when there are co-tenants who are not married to each other, It is far more likely that the deed would be drafted as tenants in common rather than as joint tenants (which in almost all jurisdictions carries with it the right of survivorship).

 

Also, generally, if the deed does not specify the type of ownership, joint ownership among unmarried individuals typically defaults to a tenancy in common. In that event, the father's will, or laws of intestate succession of the state, would control who receives the father's share of the property.

tagteam
Level 15

sale of home


@Opus 17 wrote:
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.

In all states, a deed must be accepted by the grantee(s) for there to be a valid transfer of title to land. Acceptance is usually presumed but can be explicitly rejected by the grantee(s)

 

@crk1949 needs to consult with a local attorney because it is most likely in the best interest of him and his sister to formally reject acceptance of the deed so 100% of the property's basis is stepped up to its fair market value on the date of death (which additionally assumes that @crk1949 and his sister are the sole heirs).

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