What is the fair way to divide sale of parents home put in our 5 names 15 yrs ago? A few siblings are in higher tax bracket but want tax paid first then divide equal?

[travelingg]

We are putting sale money in 5 savings accounts and if mom would like some money for a trip or whatever she can ask us for some of the money but not thinking she will actually use much of it.  $225,000 divided by 5 is this even much tax to worry about or being one of the lower tax siblings will I lose the most in the end?  I feel like it's the rich get richer and poor get poorer on this!  I don't want it to be a fight just what's fair!  They said if tables were turned I would want the break?

[Opus 17]

You may need a lawyer.

If this was a gift, and if the gift documents do not say otherwise, then each sibling owns 20% of the house and is responsible for 20% of the taxable gain (profit) on the sale.  The fact that some are in higher tax brackets than the others is tough beans, in my opinion.  The only way for them to pay less tax is for them to own a smaller share of the house.

When you sell the home, you will owe capital gains tax on the gain -- the difference between the sales price and the adjusted basis.  Because this was a gift, the cost basis is the price your parents originally paid for the home plus the cost of any permanent improvements that have been made over the years.

For example,

Parents bought the home in 1980 for $100,000 and spent $20,000 on remodeling over the years.

Gifted to 5 siblings in 1992.

Sold for $225,000 in 2017, with a 6% real estate commission ($13,500) and $2000 in county transfer taxes.

The total gain is (225,000 - 13500 - 2000) - (100,000 + 20,000) = $89,500.

Each sibling gets about $40,000 in proceeds (depending on fees and outstanding mortgage balance) and each sibling owes and pays taxes on $17,900 (1/5) of the capital gain.  Capital gains tax is 15% for almost everyone so your sib's different tax brackets may not make a difference (and it's not your problem if it did).

On your personal tax return, you would enter the sale of an asset with 1/5 the basis and 1/5 the sales price, etc.  What your sibs do is their problem.

No one's tax return will say "I sold a house for $225,000."  Each return will say, "I sold an asset worth $45,000 and here is the cost basis to calculate my gain."

Make sure you document the adjusted cost basis in case of audit -- you need to be able to prove what your parents paid to buy the house and how much they or you spent in permanent improvements.  Don't guess.   If you are audited, the IRS will assign the lowest basis that can be proven.  

What you do with the rest of the money after paying the capital gains tax (such as gifting it back to your parents) is up to you.  But it's important to note that if you own the house and sell it, then you get the money, you are responsible for the taxes, and you get to decide how to spend that money.  No one else has legal rights to it.

[Opus 17]

When I say "you may need a lawyer" I mean that as "to explain to your siblings how this will work so they don't blame any one particular sibling for anything that happens."  

Tax laws are pretty black and white.  Unless the gift documents say otherwise, each sibling just sold an asset worth $45,000, and the tax consequences for each sibling will depend on their own particular financial situation.

[travelingg]

Thank you

[travelingg]

Thank you for the prompt reply.  The home was purchase 53 years ago at $18,000.  Added a double garage and addition probably $50,000 cost.  They mention that if mom needs the money they have to pay tax on her money she wants to use.  If anything she would use it to fix her car or take a trip otherwise she has enough from pension etc... to live off each month.  She also has a small amount in stocks she is selling so I think she can also live off that so I really don't think she would need any of the money but that is the gripe why they pay tax on her money so pay everyone's taxes from capital gain out of the sale then divide the remainder when she passes.  Its just not sitting right with me but I want a fair way to say it's wrong but it's 3 of them that want it this way so if majority rules the little guy gets hurt and they avoid the bump in tax.  How do I get them to see it from my standpoint?  One of the siblings is going through the same thing with the in-laws and will probably get hit twice in one year but again she will reap the benefit of that home sale and still come out very nicely even much more then this sale so she is all worried about Capital gains.  They say to me what if tables were turned wouldn't I want my tax paid ahead out of the sale but if tables were turned then it would be the three of them saying I have money so we won't pay your capital gains.  Just frustrating and I don't want a fued just want to be fair.  They won't get a lawyer then the money goes to the lawyer.  Maybe I show them your answer and then they can see how foolish this plan is and just do the right thing!

[Opus 17]

I don't understand what you think is unfair, or maybe I don't understand what the siblings want to do.

You have to think of this as a business with 5 shares of stock and you each own one share.  Or as if your parents gave you 5 gold coins, 1 each.  You each own an equal share as an asset.  In fact, you could sell your share to a stranger, right now, without their permission probably.  You own an asset that happens to be 1/5 of a house.

There is no tax to pay before the sale.  No single tax return will show sale of a $225,000 house and a large tax bill.  If you are co-owners then each co-owner will report the sale of a $45,000 asset (1/5 share of the house) on their tax returns.  If the overall cost basis is $68,000, then the cost basis of each share is $13,600, and the taxable gain for each owner (each share) will be about $31,400  ($45,000 asset price minus $13,600 cost basis).  There is no way to set aside money in advance since there is no single "sale" with a large tax bill.  There are 5 small sales with 5 small tax bills.

The long term capital gains tax will be 15% for most people, or $4710.  There's just no way to pay it in advance, or pay it "out of the sale" in one lump sum.  The sale will have to reported on each co-owner's tax return as the sale of a $45,000 asset resulting in $4710 of tax.

(This is federal taxes.  There will probably also be 5% or so state tax, when the income shows up on your state tax return.)

If the house is owned free and clear, each co-owner should expect to get $45,000 in sales proceeds (minus commission and fees) and owe $4710 in tax so each owner should net about $39,000 after tax.  What you do with that money later (such as, give some back to your parents) is up to you.

And, if due to some scheme, you never got any of the cash from the sale, you would still have to report the sale of a $45,000 asset and owe capital gains tax of $4710.

It sounds like your parents made a terrible decision 15 years ago to give the house to their kids, because now they want to convert the house to cash for themselves -- but they don't own it any more.  It's not their house and it's not their money.  The children may have a moral obligation to contribute to their parents' well-being but it is not a legal obligation.

Now, maybe what you need to do is sell the house, each child takes $45,000 in proceeds, pays $4710 in capital gains tax, and then puts $10,000 in a trust account for your parents as a gift.  That would give the parents $50,000 of spending money, each co-owner pays their own capital gains tax, and each co-owner have about $29,000 left over for whatever.

Important information!
If you are equal co-owners, then the other siblings CAN'T SELL unless you agree and sign the papers, and you don't have to agree to anything you don't like or don't understand.  They could take you to court to force a sale, but that would cost way more than settling with you.

Or, maybe you should have the other siblings buy your share before they sell the house and do whatever.  Buy you out now and leave you out of their future plans.  You can sell your share for any price you think is fair, with the understanding that you still have to pay capital gains on the sale of your share (Sale price minus $13,600 cost basis).

Regardless of what else happens, YOU need your own lawyer at this point I think.  If your sibs keep it simple, it should cost less than $1000 to have a lawyer help you sell your share of the house and protect your rights.  If your sibs make it complicated it will cost more of course, but they will then be having to pay their own lawyers.

And for you, it's going to be better to pay $1000-2000 to keep $39,000, than to not understand your rights and end up feeling cheated, or being actually cheated.

[travelingg]

Thank you for responding, my father has passed and my mom does not want any of the money but we feel just in case we will have it in savings so if she did need it which I doubt she will it would be available.  Yes it is technically ours but we wouldn't do that to our mom and we never thought 15 years ago that anyone would be in higher tax brackets or that mom may need any of this.  My dad did it to avoid losing everything he had should he go into a nursing home and not have anything to leave his kids.  He wanted to do this and we didn't think anything of it then!  Now fast forward 15 years, 3 siblings are living very comfortable with much higher incomes and will be coming in to a lot of money where I won't be, I live comfortable I am not destitute but do not have extra money or as nice of homes etc... like they have.  I think each should just take the hit on tax and not try to figure out how much extra tax they had to pay and take it from the money we are left with it makes no sense to me, it's just they are avoiding the tax they should be accountable for because of their own income and I should not have to pay more (their) tax to be fair after the sale.  I just need the best way to explain this to them to just do what is right but not sure without getting a lawyer involved how to settle this after the sale and money dispursed but not sure how to do this without starting a fight because I love my family and do not want this to come between us!

[Opus 17]

If you are equal co-owners then each owner MUST report the sale of an asset with a sales price of $45,000 (1/5 of $225,000) and a cost basis of $13,600 (1/5 of $68,000) on their personal tax return.  Each taxpayer must pay capital gains tax on their personal tax return.

Capital gains is taxed at a lower rate than regular income.

The Capital Gains Tax rate is 15% for almost everyone, even people who are in the 25%, 28%, or 33% bracket for regular income.

The capital gains tax rate is 20% only for people whose regular income is more than $415,000 (single) or more than $466,000 (married filing jointly).

There is an additional 3.8% investment tax (for Obamacare) on the amount of the investment only, for people whose total income is more than $200,000 (single) or more than $250,000 (married filing jointly).

So I think as a practical matter, you and your siblings are all likely to owe the same tax on the sale of the house, unless some of your siblings earn more than $250,000.  You may be worrying for nothing.

If you happen to have a sibling who earns more than $466,000, then their tax on their share of the house would be $7473 instead of $4710.  If that relative thinks that you should pay him part of the difference because it is unfair that he makes $466,000 and owes 23.8% while you making $50,000 only pay 15%, then it's not you splitting the family.