Capital gains tax

[Hacdufall]

I've been on SSDI since 2011. In 2019 my mom had to go to the nursing home so I contacted a elder law attorney to see what the options were with her estate. The attorney said that since I'm on SSDI that my options were to sell the house while she was still alive and hand over the funds from selling the house or deed the house over to me and if I sold it I would pay capital gains tax and the state flat tax rate. I went with her deeding the property to me before she passed away.

My question is, at what amount will I need to pay capital gains tax? If I do sell her property can I put the funds into an IRA that I currently have from an 401K that was put into the IRA before I went on disability?

[GeorgeDenseff]

Capital gains tax are based on your income and marital status.  Below are rates for 2022.  You cannot put the funds into an IRA or 401K.  Those accounts can only be funded by money that you earn from working.  Talk with a financial advisor for suggestions on how to invest the proceeds from the house sale.

Tax filing status	0% rate	15% rate	20% rate
Single	Taxable income of up to $41,675	$41,675 to $459,750	Over $459,750
Married filing jointly	Taxable income of up to $83,350	$83,350 to $517,200	Over $517,200
Married filing separately	Taxable income of up to $41,675	$41,675 to $258,600	Over $258,600
Head of household	Taxable income of up to $55,800	$55,800 to $488,500	Over $488,500

[Hacdufall]

Thanks for the reply. I have talked to a coupe of advisors and they mentioned something about when my dad passed away in 1995 that whatever the value of the property was then that's the starting amount for the capital gains tax.

For instance, if the property value was 79k in 1995 and I sold the property for 90k, 11k would be the amount for capital gains and if so there wouldn't be any capital gains tax to pay?

[Anonymous_]

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@Hacdufall wrote:

Thanks for the reply. I have talked to a coupe of advisors and they mentioned something about when my dad passed away in 1995 that whatever the value of the property was then that's the starting amount for the capital gains tax.

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The advisors are correct; your mom's initial basis in the property would be the fair market value on the date of your father's death in 1995 (the actual step up would depend upon how title was held and whether they resided in a community property or common law state). Note that any improvements made to the property between 1995 and the date of the sale could be added to the basis.

If that figure (basis) was $79k and you sold the property for 90k (after deducting selling expenses), then your net gain (long-term) would indeed be $11k.

[Hacdufall]

Just to make sure I understand. In the scenario of 11k gains, there would be no federal capital gains tax since its not over the $41,675? Does the 2022 number apply since I will be selling the property in 2021?

[GeorgeDenseff]

It is probably a few dollars different, but won't really matter.

[Hacdufall]

I recall the advisor mentioning a Step up Basis. What exactly is that and does it apply to my situation.

[Anonymous_]

The basis of the property is "stepped up" to its fair market value as of the date of death of the decedent.

This generally applies to property acquired from a decedent.

[Hacdufall]

And also 1/2 of something in that market value. 

[Hacdufall]

So would this situation be a full stepped up basis or half? Is this example correct if it's a half?

Say the property was purchased for $30k. Then in 1995 the properties FMV was $50k. 

1/2 $50k=$25k

1/2  $30k=$15k

$25k+$15k=$40k

[Anonymous_]

@Hacdufall 

How was title held and did your parents live in a common law or community property state?

If the property was held as community property, the basis would receive a full step up.

In common law states (the vast majority of states), the step up for your mother would be one-half (i.e., the half that your mother received as a result of your father's death). The other half (her half) would be her cost basis (adjusted for any improvements made, generally).

[Hacdufall]

Both names were on the deed and I live in Ky. Would you mind to do the hypothetical math here?

Purchase price $28k

Dad passed away in 1995

Property was gifted to me in 2019

Property sold for $90k

[Anonymous_]

Can you post actual figures? For example, the FMV in 1995 and in 2019?

Your mother would have (most likely) received a step up in basis in 1995 (to the FMV) for the one-half she received as a result of your father's death. 

[Hacdufall]

I'm not sure what the FMV was in 1995 but I will call the PVA office tomorrow to find out not unless there's a better way to find that info but the accessed value that's on the property tax form for 2019 is $52,800.

[Anonymous_]

The valuation for property tax assessment purposes will, in all likelihood, differ from the fair market value.

Basically, you would need an appraisal or, at least, a competitive market analysis by a real estate agent or broker.