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Capital gains exemption

Hi, I'm in a confusing situation that I hope you can help me with. I sold my house last month and I'm trying to figure out if I qualify for the $250k capital gains exemption for a single tax payer. Now I should qualify since I've both owned and lived there for a decade. The situation here is my mom was in a nursing home and did a quitclaim deed with me to transfer the house 10 years ago. I've read that because of the quitclaim I would have to pay capital gains on what my mom paid for the house, but she inherited it from my grandmother. So it's all a little confusing. Does me being in the house a decade supersede this quitclaim issue? I should qualify for the exemption since I lived there over 2 years, correct?

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17 Replies

Capital gains exemption

You would qualify if you owned the home and used it as your main residence for the last two out of five years leading up to the sale.

Capital gains exemption

This appears to be a gift from your mother to you of the house.

 

As a result, your basis would be the lesser of her basis in the house or the fair market value on the date of the gift.

 

Your mother's basis would be the fair market value on the date of death of your grandmother. 

Capital gains exemption

Yes. It was my primary residence for a decade. So I should get the exemption. Ok, I read your second post and understand better. I got confused for a second. So my basis would be the fair market value of the house at the time my mother gifted it to me and the quitcliam deed wouldn't figure into it. I think I understand now. Thanks for the help.

Capital gains exemption

If you owned the home (or co-owned the home) for at least 2 years, and lived in the home at least 2 of the past 5 years, you qualify for the exclusion.  Your problem is determining your basis, and how much the gain actually is.  

 

If the total sales price was $250,000 or less, then even if we assume there is zero basis, your entire gain is excludable and we don't really have to consider the basis at all.

 

However, if the sales price was more than $250,000, we need to determine your basis, so we can figure out what your gain is.  If your gain is more than $250,000, you pay tax on the difference.  (For example, if your basis is $50,000 and the sales price is $350,000, you have a $300,000 gain.  You can exclude $250,000 and pay capital gains tax on the rest.)

 

To start with, your mother's basis was the fair market value on the day your grandmother died.  You can get an appraisal or market analysis from a real estate professional based on historical records.  So that's the lowest your basis might be.  The basis is increased by the cost of any permanent improvements your mother made after she was the owner.

 

Then, because this was a quitclaim deed instead of a life estate, I think your basis will be your mother's basis as of the date of the gift.  Then you can add the cost of any permanent improvements you made.  Your gain is the difference between your sales proceeds and your basis.

Capital gains exemption


@MrDeanSp wrote:

Yes. It was my primary residence for a decade. So I should get the exemption. Ok, I read your second post and understand better. I got confused for a second. So my basis would be the fair market value of the house at the time my mother gifted it to me and the quitcliam deed wouldn't figure into it. I think I understand now. Thanks for the help.


No.

 

Your basis is your mother's basis, or the FMV on the date of the gift, whichever is lower.  You don't get an increased basis with a gift.  

 

Your mother's basis is the FMV on the date of your grandmother's death (because inheriting does increase the basis although a gift does not) plus the cost of any improvements.  

 

Example: Grandmother paid $5000 for the house in 1950.  Your mother inherited the house in 2000 when the value was $100,000.  Mother gave you the house in 2015 when the value was $200,000.  Your basis is $100,000 because that is your mother's basis.  

Capital gains exemption


@MrDeanSp wrote:

.....my basis would be the fair market value of the house at the time my mother gifted it to me and the quitcliam deed wouldn't figure into it.


Your basis would be the lesser of the fair market value on the date your mother transferred it to you (i.e., made the gift) or your mother's basis (which would be the fair market value on the date of death of your grandmother).

 

The form of deed does not factor into this equation, quitclaim deed, warranty deed, et al.

 

Capital gains exemption

Ok. I think I get it now. You were very thorough and I appreciate it. I sold the house for $570,000 last month. At the time it was transferred to me in 2014 the FMV was $399,000. I'm not sure what it was in 1999 when my grandmother passed away, but I'll find out. So that's my basis? The FMV in 1999 when my grandmother died?

Capital gains exemption


@MrDeanSp wrote:

So that's my basis? The FMV in 1999 when my grandmother died?


Yes, the FMV in 1999 unless the FMV in 2014 was lower (which is highly unlikely).

Capital gains exemption

It gets a little move complicated. My mom didn't actually inherit the house from my grandmother. It was awarded to her by the court in 1997. There was a property dispute in the family. My grandma was in a nursing home at the time with dementia, and my uncle somehow got power of attorney. I don't know all the details, but the judge awarded my mother the house. Any clue how this affects the basis?

Capital gains exemption


@MrDeanSp wrote:

Any clue how this affects the basis?


Yes, now you need to determine your grandmother's basis since that is the person from whom your mother acquired the property while you grandmother was still alive.

 

Acquiring property as a result of a court order is not the same as acquiring property from a decedent so the step up (or down) in basis does not occur.

Capital gains exemption

So, lets say worst case scenario is I have to use what my grandmother paid as the basis. Which was $50,000 in 1978. Subtract that from the 570,000 with the $250,000 exclusion would be a net gain of $270,000. Then the 20 percent tax on that and I would owe $54,000? Oh man.

Capital gains exemption


@MrDeanSp wrote:

......Then the 20 percent tax on that and I would owe $54,000?


No. You have to look at the long-term capital gains tax rates. 

 

See https://www.irs.gov/taxtopics/tc409

Capital gains exemption

Oh, ok. So 15 percent of $270,000 would be $40,500. Sorry, my head has been spinning from this. I called multiple accountants this morning trying to sort it out. I appreciate your help. You've really educated me about the whole process.

Capital gains exemption

@MrDeanSp 

 

Just note that your actual tax liability will be based upon all of your income, including that long-term capital gain.

 

 

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