Splitting Proceeds of Home Sale

[Zdmajor]

My grandmother quit claimed her home to me before she died. My name is the only one on the deed. I sold the house, and I'm trying to figure out the best approach for splitting the proceeds with my sister so that I only pay taxes on my portion.

[Anonymous_ · Accepted solution]

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@Zdmajor wrote:

......I'm trying to figure out the best approach for splitting the proceeds with my sister so that I only pay taxes on my portion.

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You should most likely consult with a tax professional and an attorney in your locale.

Since you are the only one on the deed (title), splitting the proceeds with your sister would be considered a gift and there is an annual exclusion of $15,000 before you would be required to file a gift tax return (although you would likely not owe any gift tax).

Further, since your grandmother deeded the property to you prior to her death, you might not get a stepped up basis (fair market value on the date of her death) unless you can show that there was an intention by her to retain a life estate and for you to be the remainderman. 

Seek legal and tax counsel.

[TomD8]

If your sister had no ownership interest in the property (she was not on the deed), then she is not liable for any capital gains tax upon its sale, and she would not report it on her tax return.

Note that since you acquired the property prior to your grandmother's passing, your cost basis is her original cost, plus any capital improvements.  It is NOT the fair market value at the time of her death.  Your capital gain is your net sale proceeds minus your adjusted cost basis.

[Anonymous_]

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@TomD8 wrote:

Note that since you acquired the property prior to your grandmother's passing, your cost basis is her original cost, plus any capital improvements.  It is NOT the fair market value at the time of her death. 

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That really depends upon the circumstances. In short, if the property was part of her gross estate upon her passing (and, hence, acquired from a decedent), then the property gets a stepped up basis. 

The property could have been considered to be acquired from a decedent if the intention was to retain a life estate or if the gift, under certain circumstances, was made within three years of death per Section 2035.

[TomD8]

@Anonymous_   I agree that, if the grandmother retained a life estate in the property, the issue with regard to cost basis would be whether it was sold before or after grandmother's passing.  If sold after her passing, the remainderman would receive a stepped-up basis.

But I am not sure that the "three-year rule" permits a stepped-up basis when the gifted property is sold.  I think it states only that, in the case of property gifted within three years of donor's death, its value must be included in the estate for estate tax purposes.

In any case, I agree with your previous recommendation that the OP seek professional guidance.

[Anonymous_]

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@TomD8 wrote:

But I am not sure that the "three-year rule" permits a stepped-up basis when the gifted property is sold. 

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Correct, in most circumstances, but not in instances of gifts causa mortis or where an estate tax return is filed and the fair market value of the property is used as the valuation on that return.

[Opus 17]

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@Zdmajor wrote:

My grandmother quit claimed her home to me before she died. My name is the only one on the deed. I sold the house, and I'm trying to figure out the best approach for splitting the proceeds with my sister so that I only pay taxes on my portion.

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If you owned the house alone, then only you report the entire sale and pay all the tax.  If you give money to your sister later, that is a gift.  

How you report the sale, and how much tax you owe, is complicated in your situation (as indicated by the other discussion) and you should have the deed and other documents reviewed by an attorney or tax professional.  They can also advise you on a fair amount to pay your sister after you pay the taxes.

Your grandmother may have stuck you with a major tax bill if she really quitclaimed the house to you in fee simple before she died.  You will need records of what she paid for the house and any improvements that you can prove the cost for.  Professional help is strongly advised.