Capital gains

[Lrenforth1]

We had my mother’s house signed over to my brothers and myself  shortly before she died and are selling the house within six months of her death.  The house is empty and no one lived there since her death.  Do we have to pay capital gains based on the amount she paid for the house or based on the fair market value at the time of the transfer to us

[MelindaS1]

Assuming the house was legally retitled to the group of siblings before the death of the parent, you would calculate your capital gain income or loss based on the amount she paid for the house, i.e. the "transferred basis" value. The transferred basis includes any adjustments to the cost basis of the home, including qualifying capital improvements made over the years, and any gift tax paid on the transfer to the new sibling owners. See the details in IRS pub. 551 Basis of Assets in the section, Property Received as a Gift.

You would not use basis which is stepped-up to the FMV, as this would be the treatment for transfers occurring at the time of death, not beforehand. 

Learn more: 

TurboTax - 5 Things You Should Know About Capital Gains Tax

IRS - Estate and Gift Taxes. 

[M-MTax]

You might be able to use the FMV on the date of death (i.e, step-up basis) if you can show your mother retained a life estate (this would be an implied life estate).

See https://www.law.cornell.edu/cfr/text/26/20.2036-1

An implied life estate (which is the result you want) is dependent upon the circumstances of the transfer and the grantor of the deed.

See also https://patellawoffices.com/blog/planning-for-tax-minimization/navigating-inheritance-the-step-up-in...

[Opus 17]

Don't try to be your own lawyer.

Your capital gain is calculated from her cost if the house was a simple gift, but it is calculated from the fair market value on the date of her death if it was an implied life estate (meaning she had the right to live there until she died and you had no real right to sell the property until she passed.)

It would have been much better for the deed to have been explicitly written as a life estate (we can't see the deed, so maybe it was).  An implied life estate can be shown by the facts and circumstances if it was not written down, but you want to document that as much as possible in case of audit (emails, phone calls between siblings and mother expressing her intentions, etc.). You may want to speak to an attorney about proving the life estate before you file.  

[M-MTax]

No one has to act as their own lawyer here. The facts and circumstances are set forth below and the transferee(s) can determine if some or all of them are satisfied.

1) The transfer is to a family member, most typically from a parent to a child.

2) The transferor (again generally a parent) is elderly and continues to reside on the property usually until death.

3) There is some sort of understand between the parties as to the arrangement under examination.

4) The transferor, while continuing to reside on the property, pays most or all of the expenses (e.g., property taxes, utilities, mortgage interest (if any), repairs and maintenance).

5) The property is being used as the transferor's primary residence.

6) The property is sold by those formerly with a remainder interest within a short time period after death of the (implied) life tenant.

This is not rocket science; if the facts are identical or reasonably similar to those set forth above, the argument for an implied life estate will be persuasive if not determinative.