We recently sold a house that was part of an inheritance. Due to an error by the county or probate court, the deed of the house only showed our name, but not the name of our sister. At closing the title company issued the payment in our name only (not on our sister). We would like to distribute the amount that corresponds to my sister. Questions:
- Title company says that they will issue a 1099 only in our name. The house has appreciated in value since the it was inherited, so we are expecting to pay capital gain taxes. However, we plan to distribute the money to my sister. What is the process we need to follow such that we do not pay capital gain on the entire amount, but only on the amount we will keep?
- Is there a document that I need to draft to show that we paid the portion of the proceeds to my sister? Is there a form I need to submit to IRS or another document I should have my sister sign?
Thank you for your help,
You’ve got two options that I can think of.
The easy route is to conform to the paperwork. You report the entire sale as if you owned 100% of the home, and you pay 100% of the capital gains tax. Then, you make a gift to your sister in the amount she is owed (her share of the house minus the taxes). If the gift is more than $17,000, you would have to file a form 709 gift tax return, but gift tax is not actually owed unless your lifetime total gifts are more than $13 million. The purpose of form 709 is to keep track of large gifts against your lifetime limit. The recipient of the gift never pays gift tax.
The other route would be to file based on what actually happened, that you and your sister each owned half the house. Each of you would report half the sales proceeds, half the basis, and pay half the capital gains tax on your own tax returns. The IRS may send you a letter asking for more information as to why the sales proceeds that you reported don’t match the 1099S. You would reply with a letter and other proof, showing that you only inherited half the house, that the probate court made an error on the title, And that your sister reported and paid capital gains tax on the other half of the sale. You would probably have to include your sister’s name and address, so the IRS could look up her tax return and find the matching income.
I think this is less unusual than it seems, sometimes when there are more than one owner, only the first owner’s SSN will be on the 1099 anyway.
If you sell the home you can’t escape capital gains tax. But if you gift the home to your sister, her adjusted basis is the same as yours and then she would pay the capital gains tax. Although you would have to report the gift on form 709, you would not have to pay gift tax due to the >12 million dollar gift/estate tax exemption.
Thank you for your suggestions! After digging into this more I found that I should be able to file a "nominee 1099-s" with her share, then I should be able to deduct that on my return.
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